Termination and Frustration Flashcards
Termination
- Performance
- Expiry
- Agreement
- Breach
- Frustration
- expiry or other specified event
Discharge by expiry & performance
- a contract will expire when it is completed according to its own terms. Contract expiration is often by date, but a contract can also expire based on the occurrence of an event
- Generally, an obligation is discharged by complete performance of the obligation.
- Two broad categories of contractual obligations:
1. Strict contractual obligations: must be performed exactly as described
2. Qualified contractual obligations: reasonable endeavours to meet the contractual obligation - Until the obligation is completely performed, the performing party is not entitled to payment. There are four key exceptions:
1. If one party accepts partial performance, the other party is entitled to payment for the partial performance on a ‘quantum meruit’ (‘as much as he deserves’) basis;
2. If one party has substantially performed the contract, he may be entitled to the contract price subject to a deduction for the cost of remedying the defect;
3. Some contracts are clearly divisible into parts, and a party is entitled to payment for each part. This turns on the intention of the parties.
4. Where a party is prevented from completing performance by the other party’s default, he can sue for damages for breach of contract or claim a quantum meruit.
Discharge by agreement
- The parties can discharge a contract by agreeing to do so in a subsequent binding contract. For this to happen, the new contract needs to be supported by consideration (unless it is effected by deed). Particular care needs to be taken where one party has performed the old contract in full, in which case being released from it will not be good consideration.
- 2 elements must be present:
5. Accord: A agrees to release B from its obligations under the old contract
6. Satisfaction (consideration for the promise): B agrees to release A from its obligations under the old contract - A contract can include terms providing its own discharge:
a. A ‘condition precedent’ is a condition that must be satisfied before any rights come into existence. This is not discharging a contract in the strict sense, it is preventing it from becoming binding in the first place.
b. A ‘condition subsequent’ is a term providing for the termination of the contract and the discharge of obligations outstanding under the contract upon the happening of a specific event.
Discharge by breach
- In some circumstances, a contract will expressly set out what remedy is available to the non-breaching party and such provisions are usually enforceable; however, if the contract does not expressly set out the remedy, the non-breaching party must check the common law (and statute, if applicable) to determine what effect the breach has on the contract
- Any breach entitles a party to damages in principle, but a breach of a condition (or an innominate term treated as a condition) – a repudiatory breach - also entitles a party to terminate the contract.
- Repudiatory breach: a breach of a major term of a contract that goes to the root of the contract and deprives the non-breaching party of substantially the whole benefit of the contract
o The non-breaching party is not obliged to terminate upon a repudiatory breach – it has a choice to affirm or to terminate. A repudiatory breach does NOT automatically discharge a contract - The innocent party has a period of time to make this choice. A decision to terminate must be communicated. Affirmation requires a clear and unequivocal commitment to continue with the contract.
- If a party terminates, it can seek 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.
- If a party affirms, the parties’ obligations under the contract remain in place. For example, if the party in breach is obliged to make further payments under the contract in the future, this obligation will remain in force.
Anticipatory repudiatory breach
- One party tells the other party that he will not perform his future obligations under the contract
- Where the anticipatory breach goes to the root of the contract it is called an anticipatory repudiatory breach: it gives the non-breaching party the same rights as a repudiatory breach: option to discharge/affirm
How to determine whether a breach is repudiatory:
- Breach of condition – major term – repudiatory
- Warranty – minor term – breach NOT repudiatory
- Innominate term – a provision that is not clearly intended to be a condition/warranty – the breach of an innominate term only allows the non-breaching party to repudiate the contract if its effect goes to the root of the contract
Can breaching of warranties and innominate amounts to repudiatory breach?
Warranties
* Breach of a warranty does NOT undermine the overall purpose of the contract
* Breach of a warranty is NOT a repudiatory breach, and the contract remains in force after the breach, but gives the non-breaching party a remedy in damages
Innominate terms
* Innominate (unclassified) terms
* The courts consider whether the provision is a breach/warranty by considering the effect of the breach at the time it occurs
* General rule: if an innominate term is breached, the courts only classify it as a condition if the breach deprives the non-breaching party of substantially all the benefit of the contract
Frustration
- Automatically discharges both parties from their future obligations under a contract
- Frustration occurs when the law recognises, that without default of either party, a contractual obligation has become incapable of being performed because the circumstances in which performance is called for would render it radically different.
- Examples include performance becoming radically different because:
a. Performance is impossible;
May be a ground on which a contract is held to be frustrated
E.g. subject matter of contract is destroyed, if a contract is specific to a particular person, the illness/death of such person can serve as a ground to discharge the contract
b. Performance is illegal;
E.g. law changes, rendering the future performance of the contract illegal
c. The parties’ common purpose is frustrated.
A dramatic change in surrounding circumstances means that the entire basis on which the contract was concluded has been lost - A frustrating event is not something:
a. Caused by the default of a party;
b. Provided for in the contract;
c. Which is merely an increase in expense / onerousness; nor
d. Which the parties could reasonably have contemplated.
Frustration v repudiatory breach
- Frustration: automatic discharge of obligations
- Repudiatory breach: gives the non-breaching party the choice to affirm/discharge the contract
frustration and fault
- Frustration should NOT result from the act/choice of the party that seeks to rely on it
consequences of frustration
- discharges future obligations
- Under the Law Reform (Frustrated Contracts) Act 1943:
a. S 1(2) provides that money paid before the frustrating event can be recovered even if failure of consideration is only partial. Money payable but not yet paid ceases to be payable. But the court has a discretionary power within specified limits to allow the party returning the money (normally the seller/supplier) to retain a sum for expenses incurred in attempting to perform the contract.
b. S 1(3) provides that where a party receives a non-monetary benefit prior to the frustrating event, the court must a. identify and value the benefit conferred; and b. make an assessment of a just sum to be paid by that party for the benefit.
- Under the Law Reform (Frustrated Contracts) Act 1943:
- basic principles of restitution and unjust enrichment in the context of termination of contract.
- As well as the possibility of damages being awarded on the basis of the ‘expectation’ interest or ‘reliance’ interest, exceptionally damages have been awarded on the basis of the ‘restitution’ interest instead. This measures damages on the basis of ‘restoring’ to the claimant a benefit which the defaulting party acquired at his expense. This will only be awarded in exceptional cases, when other remedies are inadequate: beyond this, the case law in this area is unclear and evolving.
- A restitution claim may arise where there is a total failure of consideration.
Remedies for frustration
damages
assessment of damages for frustration
Aim is to compensate the claimant, not to punish the defendant.
* There are two main ways of doing this: awarding the expectation interest or awarding the reliance interest. The claimant can choose which.
* The normal measure is the expectation interest – damages to put the innocent party in the same position post-breach that they should have been in had the contract been performed. This is forward looking. This can be calculated by looking at:
o The cost of curing the defective performance;
o The difference in value between the performance received and that promised (but note: the cost of cure and difference in value are very often the same); or
o The loss in amenity: a sum to represent that the performance received is less valuable to the innocent party than that promised, even if the economic value is the same.
* An alternative measure is the reliance interest. It is backward looking and aims to put the claimant in the position as if they had never contracted. It is more likely to be used when the expectation measure is hard to calculate.
Types of loss and are they recoverable?
- Damages for mental distress, anguish or annoyance are not generally recoverable.
- By way of exception, they may be recoverable where the whole, or perhaps a major purpose of the contract, is to provide pleasure, relaxation and peace of mind.
- It will be rare that a purely commercial contract has such a major purpose.
- Damages for loss of reputation are generally not awarded.
- Damages for loss of a chance are recoverable if the lost chance is quantifiable in monetary terms and there was a real and substantial chance that the opportunity might have come to fruition.
