Discharge of Contracts

Question 1

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

Answer 1

(a) Performance;
(b) Expiry;
(c) Agreement;
(d) Breach; or
(e) Frustration.

Question 1

What is discharge by expiry?

Answer 1

A contract will expire when it is completed according to its own terms. Contract expiration is often by date ie the parties incorporate a term in the contract which stipulates when the contract comes to an end. For example, the contract provides that the contract will expire 12 months after
the commencement date. A contract can also expire based on the occurrence of an event. For example, a contract may include a term that the supplier is to deliver goods to the buyer within a given time frame and upon delivery the contract comes to an end.

Question 2

What is discharge by performance?

Answer 2

The entire obligations rule: 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 3

What are the four exceptions to the entire obligations rule?

Answer 3

1. acceptance of partial performance
2. substantial performance
3. divisible obligations
4. wrongful prevention of performance

Question 4

What constitutes acceptance of partial performance?

Answer 4

Where one party has given only partial performance of the contractual obligations, it is possible that the innocent party, rather than reject the work done, might accept that part of the performance. However, it should be noted that such an acceptance of partial performance is at the discretion of the innocent party. If the innocent party voluntarily accepts partial performance,
then the party in default will be entitled to payment on a quantum meruit basis.
Quantum meruit (meaning as much as is deserved) is a remedy whereby the claimant may be able to claim a
reasonable sum so that the defendant is not unjustly enriched. The court will assess the value of a quantum meruit award on an objective basis using the information available to it, for example the usual market price for goods or services.
In Sumpter v Hedges (1898) 1 QB 673 Sumpter had agreed to build two houses with stables on Hedges’ land, in return for a fixed price. After completing work worth around half of the contract price, Sumpter told Hedges that he did not have enough money to finish the job, so Hedges did it
for himself.
In Sumpter v Hedges, because the work had been done on the innocent party’s land, the court felt that the innocent party had no choice but to complete the work. He was in possession of what he could not fail to keep. This was not voluntary acceptance of partial performance as the innocent party did not have the option to take or not to take the benefit of the work done. If the court had found otherwise, however, the builder would have been entitled to a quantum meruit to compensate him for the value of the work done. In the event, he was entitled to compensation for the value of the materials which he had left on site which had not been incorporated into the
building which the innocent party used to complete the work. This was because the innocent party had the choice as to whether or not to use these, as they could have been returned.

Question 5

What constitutes 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’ (ie the aspect which has not been performed). When
considering such a plea, the court considers the nature and extent of the defect, which is done 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 any money.
However, if substantial performance is found to have been rendered, then the party will be entitled to the contract price subject to a deduction.
In defining what is ‘substantial performance’, the court takes a similar approach to when deciding whether has been a repudiatory breach of contract: the question is whether the defect goes ‘to
the root of the contract’.

Question 6

What are divisible obligations?

Answer 6

Some contracts are clearly intended to be divided into parts, eg the payment of a salary under a fixed contract of employment. If this is the case, then the performing party is entitled to payment
for each part which is performed. However, the question as to whether a contract is divisible or entire depends upon the intention of the parties.

Question 7

What constitutes 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, they will be entitled to payment despite not having completed the rest of the obligation (Planche v Colborn (1831) 131 ER 305). The innocent party has
two options:
(a) To sue for damages for breach of contract; or
(b) To claim a quantum meruit.

Question 8

What is tender of performance?

Answer 8

In an action for breach of contract for failing to perform an obligation, it is a good defence for the defendant to show that they ‘tendered performance’. In order for a plea of tender to be successful, the 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. For instance, if the seller delivered goods but the purchaser refused to accept delivery, the seller would be relieved of liability for failing to deliver. In relation to payment of a debt, a plea of tender does not discharge the debt. However, it would prevent the creditor from claiming interest or damages on that debt subsequent to the tender of performance.

Question 9

What constitutes discharge by agreement?

Answer 9

On the basis that something may be destroyed in the same manner by which it was created, a contractual obligation may be discharged by agreement. This may occur in one of two ways:
(a) By a subsequent binding contract between the parties; or
(b) Alternatively, by operation of a term of the original contract.

Question 10

How may discharge by subsequent binding contract occur?

Answer 10

For instance, 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.
This type of arrangement is very common in commercial situations where parties wish to end an existing contract and achieve commercial certainty. They will often agree the terms of a termination agreement to release and settle any liabilities under the original contract so that they can be sure that they will have no further liabilities or obligations arising from it in the future.
For this discharge to be effective, two elements must be present, sometimes called ‘accord and satisfaction’: 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’).

Question 11

How might difficulties regarding considerations be resolved when discharging a contract?

Answer 11

One way of resolving this issue is that the party to whom the obligation is owed may release the other party by a subsequent agreement under deed. This avoids the need for consideration altogether, because a gratuitous promise (one without any consideration) is enforceable if made
in a contract in the form of a deed.

Alternatively, the party to whom the obligation is owed may provide consideration by agreeing with the other party to accept something different in place of the former obligation, for example the accelerated payment of a sum payable in instalments.

Where there has been accord and satisfaction, the former obligation is discharged. The essential point is that, unless there is a new consideration, there can be no satisfaction, ie there can be no
discharge of the previous agreement and no formation of an agreement on new terms.

Question 12

Can discharge by the operation of a term in the contract occur?

Answer 12

There is no reason why a contract should not contain a term providing for the discharge of obligations arising from the contract. Such a term may be either a condition precedent or a condition subsequent.

Question 13

What is a condition precedent?

Answer 13

A condition precedent is a condition which must be satisfied before any rights come into existence. Where the coming into existence of a contract is subject to the occurrence of a specific event, the contract is said to be subject to a condition precedent. The contract is suspended until
the condition is satisfied. Where a condition precedent is not fulfilled, there is no true discharge because the rights and obligations under the contract were contingent upon an event which did
not occur, ie the rights and obligations never came into existence in the first place.

Question 14

What is a condition subsequent?

Answer 14

A condition subsequent is 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.

Question 15

What is a repudiatory breach of contract?

Answer 15

In certain circumstances, the innocent party may, in addition, treat the contract as
having been terminated for repudiatory breach. This is where one party has breached a term of the contract which is either a condition or an innominate term which is to be treated as a condition.

Termination for repudiatory breach is therefore one way in which a contract may come to an end. Generally, where there has been a repudiatory breach, a party has a choice as to whether to terminate the contract or to affirm it (keep it in place). The choice is not entirely unrestricted.

Question 16

What is an anticipatory breach of contract?

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

An indication by a party that he will not perform their contractual obligations in only a minor regard will not give rise to the right to terminate. If a party wants to rely on an anticipatory repudiatory breach to terminate the contract then it will need to demonstrate that if the breach occurred at the time performance was due it would have been repudiatory.

Question 17

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

Answer 17

Where the contract is terminated following a repudiatory breach this puts an end to all primary obligations of both parties remaining unperformed. Furthermore, the innocent party can claim damages not only arising from the specific breach but also the loss of the contract caused by the
termination of the contract as a whole.
The discharge from remaining rights and obligations is ‘prospective’ only - any rights and obligations which have accrued before termination remain enforceable. For example, if a customer owes fees for services provided prior to termination then it would still be obliged to pay them. However, it would no longer be obliged to accept and pay for services going forward.

Question 18

What are the risks of wrongful termination?

Answer 18

If a court later finds that the breach was of a warranty, then A had no right to terminate and its notice to do so was wrongful. 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 (the original contract breaker), as repudiating the contract.
By serving a notice without justification for doing so, A has turned what it thought was a termination on the grounds of breach by B into a damages claim against it on the basis that A is the party actually in repudiatory breach.
This can be disastrous commercially and the risks for the terminating party are exacerbated by the fact that unless the term which has been breached has been defined as a condition then the categorisation of the term will depend on the application of the Hong Kong Fir test. This is a high bar and can be a difficult point to establish. It is generally no excuse for the aggrieved party, A, to plead that they acted in good faith, believing that B’s breach justified the remedial action that was taken.
This uncertainty of the Hong Kong Fir test combined with the risks described above often leads commercial parties to inject certainty into their contracts by explicitly agreeing a list of breaches which will give rise to a right to terminate.

Question 19

What is the right of election?

Answer 19

Where there has been a repudiatory breach of contract, the contract is terminated only if the aggrieved party makes the election (meaning choice) to treat the breach as repudiating the contract, ie putting an end to all unperformed primary obligations. The innocent party must make their decision to terminate the contract known to the party in default (Vitol SA v Norelf Ltd, The
Santa Clara [1996] 3 All ER 193).
The innocent party is allowed a period of time in order to decide between these two alternatives.

Question 20

What are the benefits of affirmation?

Answer 20

If the innocent party elects to affirm the contract, the contract survives and the rights of the innocent party are preserved. There may be many commercial reasons why this might be a better option for the innocent party than termination. The precise rationale will depend on the
circumstances. For example, the contract may relate to a major project whereby affirming and continuing with the project and giving the contractor an opportunity to finish is a better option than abandoning it altogether and having to sue for damages and find another contractor.
In the alternative, the innocent party may calculate that if the contract can be performed such that a right to charge the contractual charges as a debt will arise, then it will put itself in a better and more certain financial position than if it terminates the contract and brings a claim for unliquidated damages. This is because the value of a damages claim is uncertain. However, if the contract is affirmed and can be performed, the right to the contractual charges is relatively clear and certain.
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 White and Carter (Councils) Ltd v McGregor [1962] AC 413.
If a party does affirm a contract, it is important to note that the innocent party will retain a claim for damages arising from the breach but cannot terminate as a result of it (so the damages would not include compensation for loss of performance of the contract as a whole). The election is
between accepting the contract as discharged or continuing. The election is not a waiver of damages from the relevant breach.

There must be evidence of a very clear and unequivocal commitment to continuing with the contract.

Question 21

What are the limits on affirmation of a contract?

Answer 21

There are two important limitations on the innocent party’s right to affirm the contract in response to a repudiatory breach. These are:
(a) The co-operation of the breaching party is required for continued performance of the contract (Hounslow London Borough Council v Twickenham Garden Developments Ltd [1970]
3 WLR 538); or
(b) The innocent party has no ‘legitimate interest, financial or otherwise’ in affirming the contract and continuing with performance (Ocean Marine Navigation Ltd v Koch Carbon Inc (The Dynamic) [2003] EWHC 1936 (Comm)).
In relation to (a), this qualification should be uncontroversial - if the innocent party requires the co-operation of the other contracting party in order to fulfil their obligations under the contract, this will prevent the innocent party claiming the contract price.
In relation to (b) it is only in extreme cases that 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 22

What is frustration?

Answer 22

From this we can understand that frustration is about events that are beyond the control of either party, occur after the formation of the contract and which render performance radically different from that which was agreed to at the time the contract was formed.
The effect of frustration is 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

What might render performance radically different?

Answer 23

Performance may be radically different for a number of reasons, three of which will be considered in this section:
(a) Performance is impossible;
(b) Performance is illegal; or
(c) The common purpose of the contract is frustrated.

It is important to note that this list of categories is not exhaustive, nor will all frustrating events fit neatly into one category or another. Indeed, a frustrating event may fit into more than one category. The whole factual matrix of the situation needs to be considered. These categories do, however, provide helpful guidance as to when performance will be considered by the court to be radically different. When considering whether a contract might be frustrated, you should use the
categories as broad guidance to assist in applying the overarching principle.

Question 24

When might make performance be impossible?

Answer 24

In Taylor v Caldwell (1863) 3 B & S 826 the defendants granted the claimants a licence to use its music hall at a cost of £100 per concert. After the contract had been entered into but before the first performance, the music hall was destroyed. No provision had been made for this risk in the contract. The court held that the contract was frustrated due to the destruction of the music hall rendering it impossible to continue with the contract.
In Taylor v Caldwell the subject matter of the contract, ie the music hall, was destroyed. Frustration may also operate where the event destroys an asset that does not form the subject matter of the contract in question, but rather is essential for the performance of the contract. For example, in Appleby v Myers (1867) LR 2 CP 651 a contract to install and maintain machinery in a factory was frustrated when the factory was destroyed by fire. The factory was not the subject matter of the contract, but was nevertheless essential to its performance.

Impossibility might be extended to situations of death or illness of one of the parties in a personal contract, especially where a specified individual is engaged to render a particular service.
In Condor v The Barron Knights Ltd [1966] 1 WLR 87, the drummer in a music group was taken ill and only capable of working three or four nights a week, whereas the group had engagements for seven nights a week, such that the contract was frustrated because the drummer was not capable
of performing the contract in the way intended.

Question 25

When might performance be unavailable?

Answer 25

The concept of unavailability is common in shipping contracts. Even temporary unavailability may discharge a contract if the interruption is such as to make performance substantially different
from what was originally undertaken. Thus, where a ship was requisitioned for a period of five months out of a year’s charterparty, the contract was frustrated: Bank Line v Arthur Capel & Co [1919] AC 435.
In Tamplin SS Co Ltd v Anglo-Mexican Petroleum Co [1916] 2 AC 397, the court had to decide whether the requisitioning of a ship (for the purposes of war) in February 1915 frustrated a fiveyear charterparty which was to last until December 1917. The court held that it did not, on the
basis that the war would soon be over and thus a considerable proportion of the charterparty would remain. In the circumstances, this was overly optimistic, but it nevertheless demonstrates
the problems facing a court in reaching satisfactory conclusions.
In Edwinton Commercial Corporation v Tsavliris Russ (Worldwide Salvage & Towage) Ltd, The Sea Angel [2007] EWCA Civ 547 the court made clear that the amount of time left to run in the contract is the starting point only in establishing frustration. A multifactorial approach should be adopted when assessing whether unavailability was sufficient to amount to frustration. The factors to be considered included: the terms of the contract itself, its matrix or context, the parties’ knowledge, expectations, assumptions and contemplations, in particular as to risk, as at the time of contract, at any rate so far as these can be ascribed mutually and objectively, and then the nature of the
supervening event, and the parties’ reasonable and objectively ascertainable calculations as to the possibilities of future performance in the new circumstances.

Question 26

How does illegality relate to frustration?

Answer 26

Frustration may also occur where a change in the law or state intervention renders performance illegal.
Key case: Fibrosa Spolka Akcyjna v Fairbairn Lawson Combe Barbour Ltd [1943] AC 32
Facts: a contract for the sale of machinery provided for it to be shipped to a port in Poland. That port was then occupied by the enemy during the Second World War.
Held: the contract was frustrated – the parties could not be obliged to perform a contract when to do so would be illegal.

Question 27

What is frustration of purpose?

Answer 27

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 that it is still physically possible to carry out the contract. It is important to remember that it must be the joint purpose of the parties. It is not enough that it is the purpose of just one party.
In the case of Krell v Henry [1903] 2 KB 740 the defendant agreed, by a written contract, to hire a room in a flat on Pall Mall from the plaintiff for two days. The purpose in hiring the room was to view the coronation procession that was to pass along the street below on those days. However, no express mention was made of this in the contract. King Edward VII fell ill and the processions
did not go ahead as planned. The Court of Appeal held that the common foundation of the contract was that the room was hired to view the king’s procession and this purpose had been frustrated. This is a highly unusual case. The rooms were hired out for the day only and both parties understood that the only purpose in hiring the rooms was to have a view of the procession.

In Herne Bay Steamboat Co Ltd v Hutton [1903] 2 KB 683, the plaintiff hired their steamboat to the defendant ‘for the purpose of viewing the Naval Review and for a day’s cruise round the fleet’.
The naval review was cancelled but the cruise could still go ahead. The contract was not frustrated. Viewing the naval fleet might have been the principal motivation for the defendant but it was not the common foundation of the contract.
In Canary Wharf (BP4) T1 Ltd v European Medicines Agency [2019] EWHC 335 (Ch) the European Medicines Agency (EMA) argued that its lease of its headquarters premises in Canary Wharf was frustrated when it was forced to move its headquarters to Amsterdam following Brexit. Mr Justice
Smith found that there was no common purpose which had been frustrated and that the parties had divergent purposes when they entered into the bargain set out in the lease. The EMA wanted
premises which suited its purposes but with flexibility as to exit and a low rent. The landlord in contrast wanted a secure long term cash flow opportunity and a balance on its obligations as to the condition of the premises. They had bargained for the possibility that the EMA might not fulfil
the full term for some reason (albeit not due to Brexit) when they entered into the contract. Putting it another way, had Brexit been a possibility then the parties could have taken it into account and still agreed an adjusted commercial arrangement. The nature of the bargain had therefore not
fundamentally changed for both parties.

Question 28

What are the limitations on the doctrine of frustration?

Answer 28

The doctrine of frustration, as Viscount Simonds stated in Tsakiroglou Co Ltd v Noblee Thorl GmbH [1962] AC 93, ‘must be applied within very narrow limits’. While in Pioneer Shipping Ltd and others v BTP Tioxide Ltd, The Nema [1981] 2 All ER 1030, Lord Roskill remarked that ‘the doctrine is
not lightly to be invoked to relieve contracting parties of the normal consequences of imprudent commercial bargains’. It is unsurprising, therefore, that the law has developed a number of
limitations on the doctrine.

‘[W]here, without the default of either party, there has been an unexpected turn of events, which renders the contract more onerous than the parties had contemplated, that is [not] by itself
a ground for relieving a party of the obligation he has undertaken.’

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

In a sense, most events are to a greater or lesser degree foreseeable. That does not mean that they cannot lead to frustration. Even events which are not merely foreseen but made the subject of express contractual provision may lead to frustration: as occurs when an event such as a strike, or a restraint of princes, lasts for so long as to go beyond the risk assumed under
the contract and to render performance radically different from that contracted for. However, […] the less that an event, in its type and its impact, is foreseeable, the more likely it is to be a factor which, depending on other factors in the case, may lead on to frustration.
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.
In Flying Music Company Limited v Theater Entertainment SA [2017] EWHC 3192 (QB), the negative effect on a contract in Greece of civil unrest and the economic crisis could not amount to frustration because at the time the contract concluded there were already signs of unrest.
Although Theater Entertainment had hoped matters would improve there was a risk that they might not and the parties were deemed to have had the opportunity to deal with this risk and allocate responsibility for it in the terms of the contract that was eventually concluded. The Court
refused to re-allocate the risks by intervening in the contract and deeming it frustrated.
However, in Canary Wharf (BP4) T1 Ltd v European Medicines Agency Mr Justice Smith found that 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 would not be relevant: There will, no doubt, be many cases where something can be foreseen as a theoretical possibility, but where neither party can be criticised for failing to take it into account.

Question 29

What if there is an express contractual provision?

Answer 29

The doctrine of frustration cannot override express and unambiguous contractual provision for the frustrating event. Commercial contracts often contain what is known as a force majeure clause, a
clause that states what will happen to the contractual relationship between the parties should a particular set of circumstances (which could otherwise amount to frustrating events) materialise.
Force majeure clauses often refer to acts of terrorism, war and ‘Acts of God’. The inclusion of a force majeure clause enables the parties to allocate risks in relation to these events at the outset and may allow for the continuance of the contractual relationship in circumstances that would
otherwise amount to frustration of the contract. It is very unlikely that a party would be allowed to rely on the doctrine of frustration in relation to a particular event when the risk has already been
provided for by the parties through a force majeure clause.

Question 30

What are the consequences of frustration?

Answer 30

If a frustrating event occurs all future obligations are automatically discharged by the common law. The Law Reform (Frustrated Contracts) Act 1943 deals with obligations arising prior to the frustrating event.

The Act 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) of the Act 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 (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 and is discussed further on the next page.
S1(2) gives the court 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. The expenses
incurred by the payee must be directly related to an attempt to perform the contract.
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. 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 the supplier has expenses exceeding the amount of advanced payments actually paid or invoiced then it cannot 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.
It is also important to note the requirement that it be just for the supplier to retain the expenses.
The sum retained or recovered to account for the expenses may not be the actual expenses incurred but only what the court considers to be a just sum having regard to all the circumstances of the case.

The court therefore has a ‘broad discretion’ when considering whether and how much to allow the payee to retain or recover to account for his expenses under s 1(2) (provided it does not exceed the
actual expenses incurred or the sums paid or payable in advance of the frustrating event).
Where the benefit conferred before the frustrating event occurs is a non-monetary benefit, s 1(3) of the Act may be of some assistance. It provides that a party who has gained a valuable benefit under the contract before the frustrating event may be required to pay a just sum for it. The task for the court when applying this subsection is, firstly, to identify and value the benefit conferred, and then, secondly, to make an assessment of the just sum that should be awarded. The amount
awarded cannot exceed the value of the benefit obtained. Provided the court does not award more than this amount, the court may award whatever sum is just, having regard to all the circumstances of the case and, in particular, s 1(3)(a) and (b).

Held: on the wording of the legislation it was clear that ‘benefit’ meant the end product of the claimant’s services, not the services themselves. So in this case, the lesser of the two options.
The practical impact of this is that where the value of the benefit has been reduced to nil by the frustrating event, the provider of the ‘benefit’ has no claim. The defendant’s benefit under s 1(3) is clearly not necessarily the value of the claimant’s performance.