Discharge of contract

Question 1

Discharge intro

Answer 1

There are several ways in which contractual obligations may be discharged. The relevant ways contracts may be discharged discussed here is by express agreement, performance or by breach. If both parties agree that neither of them wish to carry on with a contract that contains continuing obligations they may agree to bring it to an end early. In a bilateral agreement, the contract must be discharged by both parties. In unilateral agreements, the discharge is by one party. The focus here is on discharge by performance or by breach.

Question 2

Case and facts for general rule for performance of contract

Answer 2

Cutter v Powell demonstrates this general rule. Mr Cutter contracted with a ship owner to act as septon mate on a ship for the whole journey from Jamaica to Liverpool for 13 guineas. He completed most of the journey but died before they arrived in Liverpool. Mrs Cutter didn’t receive any wages for her husband’s job for this journey. She sued the ship owner. The Kings Bench held because Mr Cutter contracted for the entire journey and failed to perform his widow was not entitled to any payment. This case was taken to lay down a general rule that in entire contracts, nothing is payable until the contract has been fully completed

Question 3

Discharge by performance general rule

Answer 3

The general rule to terminate a contract through performance is that obligations must be completely performed.

Question 4

Exceptions to discharge by performance

Answer 4

• Substantial performance
• Acceptance of partial performance
• Prevention of performance
• Severable obligations

Question 5

Cases for substantial performance

Answer 5

Hoening v Isaacs
Bolton v Mahadeva

Question 6

Substantial performance

Answer 6

This occurs where the majority of the contract has been performed.

Question 7

Hoening v Isaacs

Answer 7

The defendants contracted with the claimant to decorate and furnish his flat for £750. The defendant paid £400 while the work was being carried, however he refused to pay the remaining £350 because of defects in the bookcase and wardrobe. This was found to be only minor details and the cost to correct was only £55. Court of appeal held the claimant was entitled to the contract price, less the price of correcting the defects because the contract was substantially.

Question 8

Bolton v Mahadeva

Answer 8

This case indicates that the substantial performance exemption would not apply if there were significant defects. The claimant contracted with the defendant to install some central heating for the defendants house for £560. Upon completion the defendant refused to pay because the floor was defective and the system was ineffective. Although the cost of rectifying the defects were £174, the court of appeal found the claimant was not entitled to recover because the defects were so significant thereby there had been no substantial performance.

Question 9

Acceptance of partial performance

Answer 9

If a party accepts partial performance, this may be sufficient to discharge the other party’s further obligations.

Question 10

Acceptance of partial performance case

Answer 10

Sumpter v Hedges

Question 11

Sumpter v Hedges

Answer 11

The need for acceptance is seen in Sumpter v Hedges. In this case, the plaintiff, a builder, contracted to build two houses and stables on the defendant’s land for £565. The plaintiff did work to the value of £333 and then abandoned the contract because he had no money. The defendant finished the buildings himself, using the building materials left by the plaintiff. The plaintiff brought an action to recover the value of the work he had done on the buildings. The court of appeal held that the plaintiff could not recover. The defendant had not voluntarily accepted their part performance.

Question 12

Prevention of performance

Answer 12

This is when one party would not be able to perform because of the other parties breach of contract. The contract comes to an end without full performance.

Question 13

Prevention of performance case

Answer 13

Planche v Colburn

Question 14

Planche v Colburn

Answer 14

Planche v Colburn – Claimant agreed to write a book for the defendant as part of a series of children’s books. The agreed contract price was £100 to pay payable on completion. The claimant commenced the writing and had completed a good deal of it. However, the defendant then offered to publish the claimants book as one for adults instead. The claimant refused and sued the claimant for breach of contract to recover £50 for partial performance. Court held that the claimant was entitled to recover because the defendant had prevented the performance.

Question 15

Severable obligations

Answer 15

A way to mitigate the harsh rule is to find that the contract is not entire but divisible into sections.

Question 16

Several obligations case

Answer 16

Ritchie v Atkinson

Question 17

Ritchie v Atkinson

Answer 17

Ritchie v Atkinson. The parties entered into a contract to carry cargo at a stipulated rate per tonne. The carrier only carried part of the cargo then claimed part payment. It was held he could recover the corresponding proportion of the contractual job even though he was in breach. This is because the obligations under the contract were severable.

Question 18

Discharge by breach

Answer 18

Breach of contract means a term of the contract is not adhered to, or is broken, by one or more of the parties to the contract. Breach can be actual or anticipatory.

Question 19

Actual breach

Answer 19

Actual breach means the performance doesn’t happen when it is supposed to. The injured party has a right to damages and may (depending on the terms broken) terminate. This will depend on whether the term is a condition or warranty.

Photo Production Ltd – the defendant contracted with the claimant to provide security services for the claimant factory. One of the defendants employees started a fire and destroyed the factory. The claimant sued for compensation and then appealed. His appeal was allowed because an exemption clause could not excuse a fundamental breach where the contractual obligations are breached.

If condition is breached then contract terminated, if warranty breached then the contract continues and damages will arise.

Poussard – opera singer employed and missed first 3 days of the show due to illness. Producer found new singer refused to let Poussard perform for the remaining shows. Poussard sued, court held the producer was entitled to terminate the contract as the opening night for the opera was the utmost important and failure to perform was breach of condition.

Betini – opera singer employed to give series of performances over 3 months including 6 days of rehearsal. He was ill missing first 3 days of rehearsal. Producer terminated the contract. However this was a breach because the term relating to rehearsal was less important. Betini breaching this warranty not reason for producer to terminate the contract

Question 20

Anticipatory breach generally

Answer 20

One party gives notice to the other about their decision not to perform. When there has been an anticipatory breach, this can lead to one of two situations:

Affirmation of the contract
Termination of the contract

Question 21

What happens to the contract when anticipatory breach

Answer 21

The contract does not automatically come to an end when the contract breaker repudiates. It only comes to an end when the innocent party chooses to treat the repudiation as bringing the contract to an end.

Question 22

Role of intention

Answer 22

There must be intention to repudiate. This is seen in the case of Woodar Investment Development Ltd v Wimpey. Here the claimant relied on a contractual term which allowed them to repudiate from the contract. Lord Wilberforce found that, in considering whether there has been repudiation by one party, it is necessary to look at his conduct as a whole. Does this indicate an intention to abandon and refuse performance of the contract?. In this case, the answer was no. Instead of having the necessary intention to abandon the contract, Wimpey relied on a contractual term to justify his right to terminate

Question 23

Affirmation general

Answer 23

This is when the contract will continue. The injured party must show a clear intention to affirm the contract.

Question 24

Case for affirmation, showing clear intention to continue

Answer 24

Santa Clara case - both parties had a contract for the sale of propane. When the cargo was loading the buyer telexed the seller to reject the goods. The telex was evidence of an anticipatory breach to repudiate the contract. The seller did nothing to perform after receiving the telex and later sold the goods at a substantial loss, as well as suing the buyer for damages. The buyer appealed and argued the activity demonstrated acceptance of the repudiation. The house of lords held there was no clear intention to affirm the contract and continue with its performance. The shipment of goods after loading amounted to clear intention to terminate.

Question 25

What happens if the contract continues due to affirmation

Answer 25

Injured party refuses to terminate, then the injured party could sue for damage for actual breach. If this is the case, need to think about actual breach.

White & Carter v McGregor – case shows the injured party can carry on with contractual performance and then claim the contractual price. The claimant supplied bins to local authorities. The bins were paid for by a business who displayed advertisement on them. The defendant agreed to pay for a bin in front of their garage for a period of three years. Later the same day the defendant wrote to the claimant stating they no longer wished to progress with the contract. Claimant refused to accept the cancellation. Sued for full payment. House of lord held the claimants were entitled to affirm the contract and perform their contractual obligations as well as claiming contractual price.

Question 26

Limitation on affirmation

Answer 26

The claimant must have been able to perform without the co-operation of the defendant

Hounslow - In this case, the claimant hired the defendant to build a set. There was a clause that if the defendants work were not progressing adequately the claimant would be entitled to determine the contract after 14 days of the notice being served. The defendant received such notice but refused to accept. The claimant sued and the court held it would be inappropriate to permit affirmation because performing the contract would require a high degree of active co-operation between the parties based on the way their duty was structured under the contract.

The claimant must have a legitimate interest in continuing to perform, rather than claiming damages

Clea shipping corp – Midway through a time charter, the charterers sought to prematurely return the ship to the owners in a repudiatory breach of contract. However, ship owners went ahead with expensive repairs and maintained a crew ready to sail. They then sought an arbitral award for the contract price under the charter. It was held that the owners had no legitimate interest in affirming the contract.

Lloyd J found there is a fetter on the owners right to affirm the contract in extreme cases if he had no legitimate interest in performing the contract rather than claiming damages. For there to be no legitimate interest, the conduct of the innocent party in affirming the contract must be wholly unreasonable.

Question 27

Is affirmation irrevocable

Answer 27

Affirmation is irrevocable. If the injured party decide to affirm, they cannot terminate. Stocvnia - In this case, both parties entered into 6 contracts to build 6 ships for the defendant and the price was payable by instalments. However the defendant had financial difficulties after the first instalment and noticed the claimant about the difficulty. The claimant carried on with performance and claimed instalments by giving the defendant notices for subsequent payment. Court of appeal held affirmation for anticipatory breach would not prevent the injured party from terminating for continuing after anticipatory breach for the period prior to the date for performance. All communications must be clear and delivered to the other party.

Question 28

Termination general

Answer 28

Until such time as the non-breaching party elects to treat the contract as repudiated, it must be regarded as subsisting. A party wishing to terminate a contract as a result of anticipatory breach must make this clear. In Santa Clara Lord Steyn said that he was prepared to accept that “a failure to perform may sometimes signify to a repudiating party an election by the aggrieved party to treat the contract as at an end”.

Question 29

Effect of termination

Answer 29

The injured party can claim damages from that moment. Does not have to wait until the expected date of performance.

Hochester - the defendant had contracted to employ the plaintiff as a carrier from the first of July. However, on the 11th of May, defendants informed the plaintiff that his service would not be required. The plaintiff immediately commenced an action for breach of contract. This was upheld by court. Court held the plaintiff was free to choose whether to wait for the time for performance, in which case he must then be ready and willing to perform, or to treat the contract as immediately repudiated, in which case the concurrent condition was discharged.

Question 30

Limits to compensation for termination

Answer 30

The Mihalis Angelos – this case indicates that for a contract terminated as a result of anticipatory breach the injured party is unable to recover compensation for any loss that could have been mitigated but was not. In this case, both parties contracted to ship goods to a port in north Vietnam. The ship was expected ready to load on the 1st of July. However, the ship owner had no grounds to believe the ship would be ready until a further couple of weeks from the beginning of July. Defendant cancelled the contract on the 7th of July because of the delay. The claimant sued for damage. The court of appeal held the defendant was entitled to terminate the contract and the claimant awarded no compensation because the readiness to load was not achieved and the claimant suffered no actual loss.

Megaw LJ stated:

In my view, where there is an anticipatory breach of contract, the breach is the repudiation once it has been accepted, and the other party is entitled to recover by way of damages the true value of the contractual rights which he has thereby lost; subject to his duty to mitigate.