discharge (workbook)

Question 1

what are the five ways a contract can be discharged?

Answer 1

1. performance
2. expiry
3. agreement
4. breach
5. frustration

Question 2

what is discharge by expiry?

Answer 2

when it is completed according to its own terms, for example:

• the contract provides that the contract will expire 12 months after the commencement date; or
• occurrence of an event e.g., supplier must deliver goods by a certain date, and upon delivery the contract ends

Question 3

what is entire obligations rule in discharge by performance?

Answer 3

until the obligation is performed in its entirety, the performing party is not entitled to payment

Question 4

what are the exceptions to entire obligations rule?

Answer 4

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

Question 5

what is the acceptance of partial performance exception?

Answer 5

If the innocent party voluntarily accepts partial performance,
then the party in default will be entitled to payment on a quantum meruit basis

Question 6

what is payment on a quantum meruit basis?

Answer 6

the claimant may be able to claim a reasonable sum, so that the defendant is not unjustly enriched

value will be assessed objectively e.g., the usual market price for goods or services

Question 7

what will not constitute voluntary acceptance of partial performance?

Answer 7

Sumpter v Hedges:

Sumpter only completed partial performance of work on the land.

This was not voluntary acceptance of partial performance because Hedges did not have a choice as to whether or not to accept the benefit of the work.

However, the builder was was entitled to compensation for
the value of the materials which he had left on site which had not been incorporated into the building completed by the innocent party. The innocent party had the choice as to whether or not to use the leftover materials.

Question 8

what is the substantial performance exception?

Answer 8

the performing party may be able to obtain the contract price subject to a deduction to reflect the cost of remedying the ‘defect’/the aspect not performed (unless the defect is too serious)

Question 9

how do the courts define substantial performance?

Answer 9

does the defect go to the root of the contract? (similar to repudiatory breach)

Question 10

what is the divisible obligations exception?

Answer 10

Some contracts are clearly intended to be divided into parts, eg the payment of a salary under a fixed contract of employment.

The performing party would be 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 11

what is the wrongful prevention of performance exception?

Answer 11

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.

The innocent party has
two options:
(a) To sue for damages for breach of contract; or
(b) To claim a quantum meruit.

Question 12

what is the defence available to a party accused of failing to perform their obligations?

Answer 12

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 13

what are the two ways a contract can be discharged by agreement?

Answer 13

(a) By a subsequent binding contract between the parties; or
(b) Operation of a term of the original contract.

Question 14

what is needed for discharge by subsequent binding contract to be effective?

Answer 14

accord - agreement that the obligation will be released
+
satisfaction - consider for the promise to release a party from the obligation

ie 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 15

what satisfaction (consideration) needs to be provided if the party is released from an obligation by deed?

Answer 15

none - deed is enough

Question 16

what can a party provide in place of a deed to fulfil satisfaction?

Answer 16

B agrees to accept a new and different
obligation to the existing obligation – such as
paying instalments earlier.

Question 17

what are the two terms that allow discharge by operation of a term in the contract?

Answer 17

• condition precedent
• condition subsequent

Question 18

what is a condition precedent?

Answer 18

A condition which must be satisfied before any rights come into existence.

Question 19

example of a condition precedent

Answer 19

Certain companies are required by law to obtain approval from shareholders before carrying out high value contracts. When agreeing the high value contract, the company could include a clause stipulating that it is a ‘condition precedent’ of the contract that approval is provided by the
shareholders. Until that approval is provided, the remaining rights and obligations in the contract
are not binding. If the shareholders refuse to provide the approval, then the contract never becomes binding, and the company does not infringe the law which prevents the high value contract.

Question 20

what is a condition subsequent?

Answer 20

A condition which, if satisfied, releases a party from binding obligations.

Question 21

example of a condition subsequent

Answer 21

A term which provides the right for one or both parties to end the agreement by giving notice to the other party. If the condition transpires (the giving of notice), then the contract comes to an end.

A more sophisticated version of the same idea would be a clause which entitles a party to give notice to terminate the contract if the other party commits a breach of contract of a specified seriousness.

Another common example is the inclusion of a termination clause specifying that the contract will come to an end upon the occurrence of specified events, such when a particular date occurs.
In appropriate cases the court will even imply a term to empower a party to determine the contract on giving reasonable notice to the other party.

Question 22

what are the two types of discharge by breach?

Answer 22

1. repudiatory breach of contract at common law
2. anticipatory breach

Question 23

what is a repudiatory breach of contract at common law?

Answer 23

when one party has breached either:
- a condition
- an innominate term to be treated as a condition

this entitles the other party (in principle) to treat the contract as terminated.

Question 24

the consequences of a breach of contract

Answer 24

if breach of warranty (or innominate term treated as breach of warranty) = damages only

if breach of condition (or innominate term treated as breach of condition) = damages + right of election

Question 25

what is an anticipatory breach?

Answer 25

where a party indicates they will not perform their contractual obligations in
advance of the date for performance

Question 26

when will a party have ‘renounced’ their contract, ad what will happen after this?

Answer 26

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.

Question 27

what if a party indicates that future non-performance in only a minor regard?

Answer 27

this will not give the right to terminate

Question 28

what if a party wants to rely on an anticipatory repudiatory breach to terminate the contract?

Answer 28

it will need to demonstrate that if the breach occurred at the time performance was due, it would have been repudiatory

Question 29

Where the contract is terminated following a repudiatory breach, what are the consequences?

Answer 29

1. ends all primary
   obligations of both parties remaining unperformed
2. the innocent party can claim damages arising from the specific breach
3. the innocent party can claim damages arising from the loss of the contract caused by the
   termination of the contract as a whole
4. any rights or obligations which have accrued before termination remain enforceable (eg if a customer owes fees for a service provided prior to termination, it would still be obliged to pay)

Question 30

what is a key risk involved in terminating a contract for repudiatory breach?

Answer 30

wrongful termination

Question 31

why is wrongful termination a key risk of terminating for repudiatory breach?

Answer 31

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.

Question 32

what is the Hong Kong Fir test?

Answer 32

Does the breach deprive the party not in default of substantially the whole benefit which it was
intended that he should obtain from the contract?

If yes = the term will be a condition, contract can be repudiated and damages claimed

If no = damages only

Question 33

How should parties protect against the risks of wrongful termination for terminating for repudiatory breach and the uncertainty of the Hong Kong Fir test?

Answer 33

explicitly agreeing a list of breaches which will give rise to a right to terminate

so that commercial parties have certainty in their contract

Question 34

summary of the right to election

Answer 34

Question 35

Where there has been a repudiatory breach of contract, is the contract immediately terminated?

Answer 35

only if the aggrieved party makes the election/choice to treat the beach as repudiating (ie ending) all unperformed primary obligations

and they must communicate the decision to the party in default

Question 36

what are the benefits of affirming a contract following repudiatory breach?

Answer 36

1. some commercial benefit of continuing the contract
2. 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.
3. where a party has indicated an intention not to perform its obligations (ie has renounced the
   contract), the innocent party can still affirm the contract, perform its
   own obligations and claim the sum due under the contract in a debt action
4. 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).

Question 37

how does a party show that it has affirmed the contract?

Answer 37

evidence of a very clear and unequivocal commitment to continuing

Question 38

what are the two limitations on the right to affirm the contract?

Answer 38

1. The co-operation of the breaching party is required for continued performance of the contract (should be uncontroversial); or
2. The innocent party has no ‘legitimate interest, financial or otherwise’ in affirming the contract
   and continuing with performance (only in extreme cases and will only operate if (i) damages would be an adequate remedy for the claimant and (ii) an election to keep the contract alive would be
   unreasonable.)

Question 39

what is the definition of frustration?

Answer 39

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

Question 40

what might render performance radically different (non exhaustive list)?

Answer 40

1. performance impossible/unavailability
2. performance illegal
3. common purpose is frustrated

Question 41

what will not be a frustrating event?

Answer 41

1. merely an increase in expense / onerousness
2. caused by the default of a party
3. which the parties could have reasonably contemplated
4. provided for in the contract

Question 42

what are some examples of impossibility / unavailability?

Answer 42

• music hall was destroyed, and no provision was made for this risk in the contract
• 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, however it was essential for performance
• death
• illness
• unavailability
• even temporary unavailability (shipping contracts)

Question 43

when will a contract be frustrated for illegality?

Answer 43

when a change in the law or state intervention renders performance illegal

Fibrosa Spolka Akcyjna v Fairbairn [1943]:
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 44

when will a contract be frustrated for common purpose?

Answer 44

Krell v Henry (UNUSUAL CASE. THIS HAS BEEN DISTINGUISHED RATHER THAN FOLLOWED, SEE CASES BELOW):
D agreed to hire a room in a flat in Pall Mall to viewthe coronation procession. No express mention of this in the contract. King Edward VII fell ill and the processions did not go ahead as planned.

Held: the common foundation of the
contract was that the room was hired to view the king’s procession and this purpose had been
frustrated.

Herne Bay Steamboat Co Ltd v Hutton:
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.

Canary Wharf v 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.

Question 45

what are the limitations on the doctrine of frustration?

Answer 45

1. contracts which become difficult or expensive to perform (very rare, therefore unlikely to be frustrated)
2. self-induced frustration (fault or choice of one party)
3. foreseeable events (if you failed to make provision but had foreseen the risk, frustration is less likely to apply)
4. express contractual provision (risk allocation e.g., force majeure. frustration cannot override express and unambiguous contractual provision for frustrating events)

Question 46

which Act deals with obligations that arise prior to the frustrating event (not future obligations)?

Answer 46

Law Reform (Frustrated Contracts) Act 1943

Question 47

what are the provisions in s1(2) of the Law Reform (Frustrated Contracts) Act 1943?

Answer 47

• 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.

Question 48

for the payee to recover expenses incurred by the payee (usually the supplier) out of the total sum paid/payable before the event, what must be shown?

Answer 48

under s1(2), the court has discretionary power to order such retention or recovery of money as it
thinks JUST in all the circumstances:

• the expenses must be directly related to an attempt to perform the contract
• the amount is capped and cannot exceed (i) the actual expenses incurred
  and (ii) the amount paid or payable prior to the frustrating event
• he payee must establish that the expenses were incurred
• the payee must establish that it is just for the court to deduct from the sums paid or payable to them before the frustrating event.

Question 49

under s1(2), when can expenses NOT be claimed?

Answer 49

• expenses exceeding the amount of advanced payments actually paid or
  invoiced
• If nothing was paid or payable before the frustrating
  event

Question 50

under s1(2), how does a court decide when it would be just to allow a supplier to retain expenses?

Answer 50

• ‘broad discretion, since a rigid rule is liable to produce injustice (Gamerco SA)
• if the benefit is non-monetary: a just sum may not be payable. the court will firstly identify and value the benefit conferred, and then, secondly, 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).

Question 51

what are the provisions in s1(3) of the Law Reform (Frustrated Contracts) Act 1943?

Answer 51

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