Discharge of a Contract

Question 1

What 4 ways can a contract can be discharged?

Answer 1

1. Performance:
2. Breach/Repudiatory Breach
3. Agreement
4. Frustration

Question 2

Discharge by performance.

Answer 2

A contract can be discharged (cease to exist) when the parties have fully performed their individual and respective obligations under the contract. If one party still has not met his obligations under the contract, he may be liable for breach.

Question 3

Exceptions to discharge by performance - 4 exceptions

Answer 3

1. Contracts that are divisible or severable:
   If a contract can be divided into separate parts, the court will deem performance has been completed for each part when the obligation relating to that part is fulfilled.
2. Substantial Performance:
   Where a party has substantially performed his side of the contract, the court can allow him to collect payment for the obligations he has fulfilled and deduct damages on the uncompleted obligations. The problem lies in determining what constitutes substantial performance. A party may not be paid at all if he has not engaged in substantial performance so what constitutes substantial performance becomes very important.

*Bolton v Mahedeva: An electrical contractor hired to install a central heating system completed the work but the device(which cost GBP 560) gave off fumes, did not work properly and had GBP 174 worth of defects. His action for payment failed because the CA held he had not substantially performed his obligations.

3. Acceptance of Partial Performance:
   Where a party has partly performed his obligations, the contract will be deemed discharged if the other party accepts it as full performance.
4. Performance Prevented by the Promisee:
   Where one party prevents the other from fulfilling their obligations by some act or omission, the strict rule cannot apply and the party so prevented may have an action for damages.

Question 4

Discharge by Breach/Repudiatory Breach:

Answer 4

When a party breaches a condition of the agreement, the other side will be absolved of their obligations and the contract will be deemed discharged. This is so in a situation where one party indicates whether expressly or impliedly (by conduct) that they intend to breach their obligations under the agreement. The other party needs to wait for the breach to occur to set aside their obligations under the agreement and bring action for damages. This is referred to as anticipatory breach.

*Hochster v De la Tour: H was hired to work as a courier commencing work two months following the date of the contract, and D wrote him a month later to cancel the agreement. D answered H’s claim by arguing he couldn’t sue unless he could show that on the due date, he would’ve been ready to perform. The court disagreed holding that the victim of a breach needs not wait until the actual breach occurs in order to sue.

Question 5

Discharge by Agreement:

Answer 5

This happens where both parties agree to end the contract releasing each other from their obligations. There must be accord and satisfaction shared by both parties (consensus ad idem). Satisfaction means both parties have given consideration for the discharge. Problems arise where one party has given consideration for the discharge and the other has not. Even if there is accord, the contract will be discharged unless that party gives consideration. The exception here is contracts made by deed which neither require consideration to be validly formed nor to fully discharge by agreement.

Question 6

Discharge by Frustration:

Answer 6

This is a situation where there is a factor beyond either party’s control preventing a party(ies) from performing their obligations under the contract. Where there is a breach or a change in circumstances following the formation of the contract that is neither party’s fault but which renders the contract impossible to perform or deprives it of its commercial purpose, both parties are discharged and neither can sue the other. One such circumstance is where the subject matter of the contract is destroyed.

*Taylor v Caldwell: T rented the Surrey garden and music hall from C to be used for a series of concerts and fetes. The music hall burnt down before the concerts could start rendering performance impossible. The contract contained no stipulations on what should happen in the event of a fire. Since T had spent money on advertisement of the concerts and other preparations, he sued C under the principle of Paradine v Jane. The court held that the commercial purpose of the contract had ceased to exist rendering performance impossible and excusing both sides from further performance.

Question 7

3 Types of frustration:

Answer 7

1. Subsequent Illegality:
   A change in the law that renders the contract illegal to perform in the manner anticipated may frustrate the contract.

*Fibrosa Spolka Akcyjna v Fairbairn Lawson Cimbe Barbour Ltd: A contract containing a war clause for a sale of machinery to a Polish company could not be executed because of the German invasion. The contract was frustrated regardless of the war clause because it only anticipated delays in delivery and not the effects of the invasion.

2. Personal Incapacity:
   a personal incapacity affecting one party through no fault of his own will frustrate the contract.

*Condor v The Baron Knights: A pop group had been contracted to perform 7 nights a week if necessary. When one of the members fell ill and was advised to rest and work fewer hours, though he ignored the advice, the contract was held to be frustrated as this necessitated a stand-in musician if he fell ill.

3. Where the contract cannot be performed in a specified manner

*Nichol & Knight v Ashton Eldridge: N & A agreed to transport a cargo of cotton seed from Egypt to England specifying in the contract on which vessel the transport would happen: the Orlando. The ship was undergoing repair work when the contract was due to be performed. It was held that by specifying the exact vessel which would transport the cargo, the contract was frustrated as it was impossible for the ship to to transport the cargo within the agreed period.

*Krell v Henry: A contract was agreed for the hire of a room overlooking the procession route for the coronation of King Edward VII. Although it contained no clause mentioning the purpose of the hire, the contract was held frustrated when the King’s coronation was cancelled due to illness and the defendant refused to pay for the room. The rule in Taylor v Caldwell was applied by the court and it was held that the foundation of the contract was watching the coronation procession and the defendant was relieved of further performance.

Question 8

Situations where Frustration will not be applied by the Courts

Answer 8

1. Where mere difficulty or more expense is involved in fulfilling contractual obligations.
2. Where impossibility has been caused by one of the parties.
3. Where the frustrating effect ought to have been foreseen by one or both parties.
4. Where the contract contains a force majeure clause.

*Davis Contractors Ltd v Foreham UDC: here the builders could not use their inability to make the same profit to justify the contract frustrated.

*White & Charter Ltd v McGregor: Under contract, one party was to supply bins to a local council which would be paid for with revenue from a business that would use the bins to place ads for a 3 year period. One such business backed out of the arrangement before the bins had been prepared. The bin supplier nevertheless prepared the ads and continued to use them for the whole period of the contract and then sued successfully for the full price.

*Avery v Bowden: B was contracted to load cargo onto a ship for A. When it became clear that B would be unable to meet his obligation, A could have sued but nominated to wait hoping the B would honour his obligations and intended to sue if not. This turned out to be a mistake since the Crimean war broke out, frustrating the contract and leaving A with the loss. The court ruled against A because the war frustrated the contract and had A sued immediately or before the war, he would have been successful.

The intention to breach an agreement can be deduced from conduct (as in the Avery case where it was oral) or from writing (as in the De la Tour case). The innocent party has the right to sue for anticipatory breach the moment the intention to breach has been expressed to him.