Discharging a Contract Flashcards
Effects of consequence of discharge
- On discharge of a contract, parties to the contract are released from further obligations or from further performance of outstanding obligations under the contract.
- Rights, obligations and liabilities which have already accrued before the discharge continue unaffected
- With respect to payments not yet due at the time of discharge, the party who has conferred a benefit on the other party may sue for the reasonable value of the benefit on a quantum valebat or quantum meruit.
4 ways of discharging a contract
(a) by performance;
(b) by agreement between the parties;
(c) by operation of law; and
(d) through frustration.
Discharge by performance
A contract is discharged if and when the parties perform their obligations under it.
*The general rule is that a contract is not discharged unless a party has completed the performance of all the contractual obligations precisely according to the contract.
- s 63 of the Act now allows a party to claim compensation for the benefit conferred on the other party where a contract has partly been performed at the time when the contract is discharged through frustration
Discharge by Agreement (2 ways)
Contracts can be discharged by agreement between the parties.
*Such agreements can be found in either:
(a) the original contract itself – a contract contains a term providing for its own termination on the occurrence or failure of some named event;
or
(b) some subsequent agreement – parties to a contract make a new contract agreeing to bring the old contract to an end.
Discharge by Subsequent Agreement (4 ways)
*By novation - substitution of a new contract for an old one. The new agreement extinguishes the rights and obligations that were in effect under the old agreement.
*By accord and satisfaction – When a lesser sum is paid and accepted in settlement of a debt. The ‘accord’ is the agreement to discharge the obligation and the ‘satisfaction’ is the consideration which binds the parties to the agreement.
*By remission – When a party to a contract at whose option the contract is voidable rescinds it, the other party need not perform his/her promise.
By waiver – When a party to a contract abandons or relinquishes his/her rights under the contract, the contract is discharged.
Discharge by operation of law (3 ways)
*Bankruptcy – once a person is adjudicated bankrupt, he/she is released from certain specified debts and liabilities.
*Death – where a contract is personal in character, or where personal skill or ability is involved, death of the promisor discharges the contract.
*Merger – merger of superior right into an inferior right. For example, when a higher security is accepted in the place of the lower security, the later vanishes or merges into a higher security.
Discharge by Frustration: Doctrine of Absolute Liability - (Paradine v Jane) (King enemy invasion)
The “basic rule as to absolute contracts”: “A party, having voluntarily undertaken an absolute and unconditional obligation, cannot escape liability for damages just because, as events have turned out, performance is impossible or futile.”
- Plaintiff sued Defendant under lease for unpaid rent
- Defendant pleaded that as a result of the invasion of an enemy of the King
- Defendant was forced out of possession of the property
- Defendant refused to pay Plaintiff the rent arguing that he had been deprived of the use of the land
- Held: Defendant must pay the required rent to Plaintiff. Defendant remained liable even though he was unable to retain possession of the property because Defendant bound himself to this agreement
Discharge by/through frustration (4 ways)
- absolute impossibility;
- radical difference;
- supervening illegality; and
- futility.
Essence of Frustration - three factors - 2 factors for radical difference
(1) The supervening event occurs after the contract was entered into.
(2) The supervening event arises without default of either party;
(3) The supervening event was not reasonably contemplated by either party at the time of entering into the contract;
The next 2 elements apply to frustration through radical difference:
*The supervening event significantly changes the nature (not merely the expense or onerousness) of the outstanding contractual rights and/or obligations of the parties rendering it a thing radically different from that which was undertaken by the contract;
*It would be unjust to hold the parties to the literal sense of its contractual rights and/or obligations in the new circumstances.
Discharge by frustration - 1) Frustration by Absolute Impossibility - (Taylor v Caldwell) (Music hall fire)
This refers to those situations where a supervening external event, which was not contemplated by the parties to the contract, makes future performance physically impossible.
- Defendant owned a Music Hall and agreed to rent it out to Plaintiff
- The music hall burned to the ground a week before the first concert was to be given
- Plaintiff sued Defendant for breach of contract
- Held: Plaintiff’s action for breach of contract failed
- the contract had been frustrated as the fire meant the contract was impossible to perform
Discharge by Frustration - 2) Radical Difference
A contract is frustrated if performance has not become impossible in an absolute sense but has become radically different from that which was contemplated by the original contract.
Discharge by Frustration - 2) Radical Difference - (Codelfa Construction Pty Ltd v State Rail Authority of New South Wales) (railway shifts)
- Codelfa was contracted by the State Rail Authority (SRA) to excavate railway tunnels within 130 weeks, working three shifts daily.
- Due to noise and vibrations, local residents sought an injunction, which was granted, reducing Codelfa’s work to six days a week and two shifts daily.
- Both parties assumed no injunctions would apply based on faulty advice.
- Codelfa claimed extra costs and lost profits, arguing either an implied term was breached or the contract was frustrated.
- Held: the contract was frustrated as the circumstances radically changed. Codelfa’s claim for compensation on a quantum meruit basis succeeded.
Discharge by Frustration - 2) Radical Difference - (Davis Contractors Ltd v Fareham Urban District Council) (war delays construction)
- Plaintiff contractors agreed to build 78 house for the defendant within 8 months for a fixed price
- Due to post war delays in labor availability, the project took 22 months to complete through no fault of either party
- Plaintiff claimed the contract was frustrated due to the labor and material shortages, seeking additional payment beyond the contract price
- Held: the contract was not frustrated, the unexpected events made the contract more difficult but did not radically alter its nature
Discharge by Frustration - 2) Radical Difference - (The Power Co Ltd v Gore District Council) (Electricity price inflation)
- in 1927, The Power Co Ltd and the council entered into an agreement to supply electricity to the council for one penny per unit
- The contract was expressed to be binding “for all time hereafter”
- The price of electricity increased substantially as a result of inflation
- The power Co ltd purported to terminate the contract on the grounds of frustration due to the inflation making their obligation radically different from the original contract
- Held: the contract was not frustrated
- It is not sufficient that the contract has become more burdensome or performance more expensive
4 ways a plea of frustration will not succeed (with cases)
1.where the allegedly frustrating event is self-induced. See Maritime National Fish v Ocean Trawlers Ltd [1935] AC 524.
2.where the frustrating event should have been foreseen. See Walton Harvey Ltd v Walker & Homfrays Ltd [1931] 1 Ch 274 .
3.where specific provision has been made for the event. See Claude Neon Ltd v Hardie.
4.where the contract is merely delayed or interrupted. See Davis Contractors Ltd v Fareham Urban District Council [Discussed earlier]; The Power Co Ltd v Gore District Council.
