Termination

Question 1

how can a contract be terminated?

Answer 1

o Discharge following repudiatory breach (choice of innocent party)
o Frustration (automatic termination of contract)
o By performance

Question 2

when does a repudiatory breach occur?

Answer 2

A repudiatory breach occurs when there has been a breach of a condition or innominate term

Question 3

what can the innocent party do if there has been a repudiatory breach?

Answer 3

o Affirm contract (i.e. treat the contract as ongoing); or
o Discharge the contract.

Question 4

what is affirmation? How can it take place? Give an example.

Answer 4

Affirming a contract means to indicate an intention to continue with a contract, rather than rescinding it.

Affirmation can be done explicitly or through actions. For example, an employee who continues to work after an employer’s breach of contract is affirming the contract. This means the employee loses the right to argue that they were constructively dismissed

Question 5

what effect does affirmation have?

Answer 5

Affirmation is a bar to terminating the contract i.e. once it has been affirmed, the innocent party cannot change their mind.

Question 6

what is the doctrine of frustration?

Answer 6

The doctrine of frustration is a principle that allows a contract to be set aside if an unforeseen event makes it impossible to perform or fundamentally changes the contract’s purpose. The following conditions must be satisfied:
o Radically different
o Without fault
o Unforeseen

It is quite difficult to invoke

Question 6

what contracts can be terminated and why? what is the effect of termination?

Answer 6

Only future contracts can be terminated. Termination will be not possible if the contract has already been performed.

This is because there has to be future obligations to terminate. Both parties will be discharged from their future obligations

Question 6

re: doctrine of frustration

what is meant by ‘unforeseen’?

Answer 6

the reason a party could not perform the contract must be unforeseen and unprovided for in the contract. It must not have been in contemplation of either party.

Question 7

re: doctrine of frustration

what is meant by ‘without fault’?

Answer 7

it must be completely without fault of either party and beyond their control.

Question 8

re: doctrine of frustration

what is meant by ‘radically different’?

Answer 8

the change of circumstance or event must make performance of the contract impossible or radically different. Just because it is more expensive or time consuming is not sufficient.

Question 9

re: doctrine of frustration

what are categories of frustrating event case law has determined to be ‘impossible/radically different’?

Answer 9

o Government intervention - a reservoir was being built and the government intervened and said they needed the tools and man power for the war effort.
o Unavailability of a specific person - the person must be vital to the contract
o Illegality - if a contract becomes illegal it will be frustrated. You cannot provide for this in the contract.
o Impossibility - if it becomes impossible to perform the contract i.e. destruction of the subject matter
o Non-occurrence of a fundamental event - i.e. the cancellation of the coronation of Edward the 7th. Lots of cases rely on this element.

Question 10

what is the position in relation to delay and the doctrine of frustration?

Answer 10

Delay is not a category of frustration and is more likely to amount to breach of contract. However, a contract may be frustrated by delay if the delay meant it was physically impossible to perform (and thus falling under the category of impossibility)

For a contract to be frustrated by delay, it must become impossible or radically different to perform, that fact it will now take longer, become more difficult to perform and / or less profitable is not sufficient

Question 11

give an example of delay and the doctrine of frustration

Answer 11

a 14 month delay in completing a building contact due to labour shortages was held not to frustrate a contract. The building contract had become more expensive and difficult to perform, it had not become radically more different. Furthermore, the parties should have foreseen the cause of delay and provided for it in the contract.

Question 12

re: doctrine of frustration

what is an example of unforeseen

Answer 12

an order for machine parts does not arrive due to road closure. This is a foreseen possibility that should have been considered when entering into a contract so the defence wouldn’t be available in this instance.

Question 12

give examples of when a contract will be radically different and thus frustrated

Answer 12

o a fire burns down the theatre where a play is due to be held. The subject manager of the contract has been destroyed so it is impossible to perform the contract.
o someone agrees to write a book for another but they fall ill.

Question 13

give examples of when a contract will not be radically different and thus not frustrated

Answer 13

o 10 year lease of a warehouse. The street is closed for 18 months.
o A decorator from a company falls ill. Another decorator from the company can finish the work.
o Someone agrees to hire a ship to view the royal Naval Review and for a day’s cruise around the fleet. The Review is cancelled due to the King’s illness. This was not the sole purpose of the contract and a day’s cruise is still possible and so performance is not radically different

Question 14

as the ability to rely on frustration is limited, what do parties to contracts often include to protect themselves?

Answer 14

make express provision to excuse parties for performance in the event of exceptional circumstances by way of a force majeure clause

Question 15

what is the effect of frustration of a contract?

Answer 15

• The contract will automatically come to an end as a matter of law (i.e. both parties will be released from all future obligations) – the innocent party does not have a choice between discharge and affirmation as they do with repudiatory breaches
• Neither party will be in breach of contract

Question 15

what is a force majeure clause?

Answer 15

A force majeure clause is a clause the removes liability for unforeseeable and unavoidable circumstances that prevent parties from fulfilling their contractual obligations

Question 16

what is the effect of a force majeure clause?

Answer 16

once the force majeure clause is included (and determined to be reasonable if before the court), unexpected events become foreseeable (and are governed by the contract) and the doctrine of frustration is no longer available. The parties will be governed by s3 UCTA 1997 (i.e. was is reasonable to include such provision).

Question 17

what is in place in relation to the rights and liabilities of parties to a frustrated contract?

Answer 17

The Law Reform (Frustrated Contracts) Act 1943 (LRFC 1943)

Question 18

what is the purpose of the Law Reform (Frustrated Contracts) Act 1943?

Answer 18

The act’s purpose is to amend the common law rules that previously governed the return of pre-payments in frustrated contracts. The LRFC 1943 also introduces the idea that non-financial benefits may be returned in the event of a frustrated contract

Question 19

what is the position in relation to expenses under the Law Reform (Frustrated Contracts) Act 1943?

Answer 19

• Any expenses that have been incurred by the payee before by the frustrating event can be recovered;
• Money payable before the frustrating event does not need to be paid
• However, where expenses have been incurred by the payee in performing the contract before it became frustrated, the court has a very wide discretion to allow the payee to keep or claim sums out of money that has been paid or should have been paid before towards the expenses

Question 20

if the court exercises discretion under s2 Law Reform (Frustrated Contracts) Act 1943, how is it limited?

Answer 20

If the court exercises its discretion, what they can award is limited to the total money paid and payable prior to the frustrating event .

Nevertheless, the court must do justice and is not obliged to award the maximum amount

Question 21

what is the position in valuable benefit to expenses under the Law Reform (Frustrated Contracts) Act 1943?

Answer 21

There shall be payable a just sum for any benefit that has been conferred prior to the frustrating event

The courts have discretion to determine what is a just sum. In reaching this determination, the courts must have regard to:
o all of the circumstances, including;
o expenses incurred by the benefitted party; and
o the effect the frustration has had on the benefit.

If the frustration has wiped out the benefit, a just sum might be nothing at all. However, if the party got some benefit from it before it was wiped out, the court would need to value the benefit taking into account expenses incurred and money to be paid.

Question 22

when considering valuable benefit, what must the court consider?

Answer 22

the courts must have regard to:
o all of the circumstances, including;
o expenses incurred by the benefitted party; and
o the effect the frustration has had on the benefit.

Question 23

what is the doctrine of complete performance?

Answer 23

Under this doctrine, unless and until performance is precise and exact, a contractor is not entitled to anything under the contract.

Question 24

what is the caveat to the doctrine of complete performance?

Answer 24

if an advanced payment has been made, they may be able to keep that in restitution so long as there has not been a complete failure of consideration

Question 25

what is the effect of the doctrine of complete performance?

Answer 25

It can operate very harshly because if performance of the contract isn’t perfect, they are not entitled to the price under the contract. They may be entitled to damages or a reasonable sum if one of the exceptions applies:
o Divisible contracts
o Substantial performance
o Wrongful prevention
o Voluntary acceptance of part performance

Question 26

re: doctrine of complete performance

what is meant by divisible contracts?

Answer 26

This means that the contract was divided into discrete parts i.e. a certain amount if payable on completion of each part of the contract.

Once each part is completed, the contractor is then entitled to be paid for it.

Question 27

re: doctrine of complete performance

give an example of a divisible contract

Answer 27

o a decorator agrees to paint a kitchen for £200, £400 for the dining room and £300 for a bedroom, payment to be made as each room is completed. The kitchen and bedroom are completed but he abandons the project before finishing the fining room.

o the claimant would be entitled to be paid for decorating the kitchen and bedroom, which he completed. They would not be entitled to any money for the work he had done on the bedroom.

Question 27

re: doctrine of complete performance

what is meant by substantial performance?

Answer 27

The contract has been complete but there is a very slight defect in performance. In this instance, the contractor will be entitled to the price minus the cost of putting right the defect

Question 28

re: doctrine of complete performance

what is the general rule in relation to substantial performance?

Answer 28

As a general rule - as long as the cost of putting right the defect is no more than 1 / 14th of the contact price, a court will accept the work has been substantially performed.

Question 29

re: doctrine of complete performance

give an example of substantial performance

Answer 29

The contract price was £10,000, payment on completion. Michael has discovered some minor defects, caused by faulty workmanship that will cost £100 to put right, and is refusing to pay Benjamin any more money.

Benjamin finished the work and it is slightly defective. He has substantially performed the contract and so will be entitled to £10,000 less £100 ie £9,900.

Question 30

re: doctrine of complete performance

what is meant by wrongful prevention?

Answer 30

a contractor is wrongly prevented from undertaking the contract

Question 31

re: doctrine of complete performance

what remedy is available for wrongful prevention?

Answer 31

If the contractor is wrongfully prevented from completing performance, they can either claim damages (typically for loss of profit) or a reasonable sum in restitution for that they have done.

Question 32

re: doctrine of complete performance

what is an example of wrongful prevention?

Answer 32

the recipient has directed the contractor to stop performing the contract due to breach of an innominate term (like s13 SGSA 1982 implied term of reasonable care and skill) but there in fact was no such breach (i.e. the party’s performance is not that bad and falls short of a repudiatory breach which allows for termination of a contract), there was only a breach of a minor term which does not allow the recipient to terminate the contract.

There will only be wrongful prevention (and therefore money payable to the contractor) if they have been incorrectly prohibited from performing the contract

Question 33

re: doctrine of complete performance

what is meant by voluntary acceptance of part performance?

Answer 33

Voluntary acceptance of part performance is when one party to a contract accepts partial performance from the other party, in this instance the other party will not be liable to pay anything.

Question 34

re: doctrine of complete performance

what is the key element to look for when considering whether there has been voluntary acceptance of part performance?

Answer 34

The key here is whether the innocent party had a genuine choice whether or not to accept part performance. If they have no choice (i.e. the contractor abandons a job), then the innocent party may not have to pay anything.

Question 35

re: doctrine of complete performance

give an example of voluntary acceptance of part performance?

Answer 35

A builder agreed to construct two houses and a stable. He abandoned the job. The customer completed the job with the tools and materials the builder had left behind. The builder claimed for the work done and materials supplied. The claim for the work failed as the customer had no choice but to accept what had been done. However, the customer did have a choice as to whether or not to use the materials that had been left. Therefore, he was ordered to pay a reasonable sum for these.

Question 36

when may a force majeur clause be overridden?

Answer 36

if the clause is contested before the court, it is subject to the reasonableness test in the UCTA 1977. If it fails this, a party may not be able to rely on this.