Termination / Discharge of Contracts

Question 1

what 4 ways can a contract be discharged?

Answer 1

1) expiry of time or another specified event

2) performance

3) breach

4) frustration

Question 2

what is the effect of a contract being discharged?

Answer 2

obligations of both parties are brought to an end

Question 3

how can a contract be discharged by expiry of time?

Answer 3

a term in the contract can stipulate that the contract will expire on a specific date

e.g., contract states it will expire 12 months after the commencement date

Question 4

how can a contract be discharged by a specified event?

Answer 4

a term in the contract can stipulate that the contract will expire based on the occurrence of a specified event

e.g., contract including 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 5

how can a contract be discharged by performance?

(entire obligations rule)

Answer 5

the entire obligations rule = a contractual obligation is discharged by a complete performance of the obligations

Question 6

will a party be entitled to payment under a contract if it did not completely perform its obligations?

Answer 6

No - the entire obligations rule means that a party cannot bring a claim for payment until its performance is entirely complete

this is even if the party brings a claim for half payment for performing half of its obligations

Question 7

what are the exceptions to the entire obligations rule? (4)

i.e., in what cases does incomplete performance discharge the contract?

Answer 7

(1) acceptance of partial performance

(2) substantial performance

(3) divisible obligations

(4) wrongful prevention of performance

Question 8

acceptance of partial performance

when can this be an exception to the entire obligations rule?

Answer 8

the innocent party has the discretion to accept partial performance of the other party’s contractual obligations

BUT: the innocent party must have had a choice to accept or not accept partial performance

the defaulting party will then be entitled to payment on a quantum meruit basis (as much as deserved)

Question 9

divisible contracts

when can this be an exception to the entire obligations rule?

Answer 9

some contracts can be divided into parts only where the parties have intended this

the performing party will be entitled to payment for each part which is performed

e.g., salary payment for a fixed employment contract

Question 9

substantial performance

when can this be an exception to the entire obligations rule?

Answer 9

where a contract has been substantially performed, it is possible for the performing party to obtain the full contract price with a deduction to reflect the cost of remedying such defect (defect = aspect which is not performed)

in determining if the contract was ‘substantially performed’ the court asks if the defect goes to the root of the contract (if yes then no substantial performance)

also, it considers the nature and extent of the defect by measuring the cost of remedy against the contract price (if big difference then defect is too serious and party is not entitled to recover money)

Question 9

wrongful prevention of performance

when can this be an exception to the entire obligations rule?

Answer 9

if one party performs part of their obligations but is prevented from completing by the other party’s fault, then they are entitled to payment despite not having completed the entire obligation

they have the choice between:
(1) suing for damages for breach of contract, or
(2) claiming a quantum meruit

Question 10

if one party claims that it does not owe the other party payment under a contract because the other party failed to perform its entire obligations, what defence is available to the other party for this claim?

Answer 10

D has a defence of showing they ‘tendered performance’

this is unconditionally offering to perform their obligations in accordance with the contract but the other party refused to accept such performance

e.g., seller delivered goods but buyer refused to accept delivery

Question 11

how can a contract be discharged by a party’s breach? (2)

Answer 11

(1) anticipatory breach: where one party indicates by word or conduct that it will not perform its obligations before the date of performance (and this breach would have been repudiatory) the innocent party can accept the renunciation and treats the contract as terminated

(2) repudiatory breach: where one party breaches a condition or innominate term treated as a condition - the innocent party can treat the contract as having been terminated

Question 12

what is an anticipatory breach of contract?

what can the innocent party do?

Answer 12

where one party indicates by word or conduct that it will not perform its obligations before the date of performance

the innocent party can treat the contract as terminated if it shows that if the breach occurred at the time of performance it would have been a repudiatory breach (not a minor breach)

Question 13

what is a repudiatory breach of contract?

what can the innocent party do? (2)

Answer 13

where one party breaches a condition or innominate term treated as a condition

(i.e., a term going to the root of the contract, or a term breach of which deprives the party of the benefit intended to obtain from the contract)

the innocent party can either:

(1) elect to treat the contract as terminated and claim damages arising from the breach AND damages arising from the loss of the contract (all remaining obligations are terminated)
or
(2) elect to affirm the contract and claim damages arising from the breach (remaining obligations and rights of parties survive)

(it is allowed a reasonable period of time to decide which to elect - but it must mitigate its loss in case it decides to terminate)

Question 14

what types of damages can the innocent party claim if it elects to terminate the contract as a result of a repudiatory breach? (2)

Answer 14

(1) damages arising from the breach of contract

AND

(2) damages arising from the loss of the contract caused by the termination of the contract as a whole

Question 15

how is a contract affirmed?

Answer 15

there must be evidence of a very clear and unequivocal commitment to continue with the contract

Question 16

why would a party choose to affirm a contract instead of terminating it?

Answer 16

• affirming may be more desirable than finding an alternative contract
• the innocent party is in a more certain financial position if it affirms and is allowed the right to charge the contractual charges as a debt rather than claiming uncertain unliquidated damages after termination
• the risk of wrongful termination means that if the court later finds that the breach was of a warranty not a condition then the innocent party would actually be in breach of condition and liable to pay damages

Question 17

what are the 2 limits to affirming a contract in response to a repudiatory breach?

Answer 17

the innocent party cannot affirm a contract where:

(1) the cooperation of the breaching party is required for the continued performance of the contract

(2) they have no legitimate interest in affirming the contract

Question 18

what is frustration of a contract?

Answer 18

Without default of either party, a contractual obligation has become incapable of being performed after the contract is formed, because the circumstances render the performance radically different from that which was agreed at the time the contract was formed

(frustration can be raised as a defence to an action for breach of contract)

Question 19

what might render performance of an obligation ‘radically different’ from that which was agreed - in order to frustrate a contract? (3)

Answer 19

(1) performance is impossible -

• total or partial destruction of the contract’s subject matter OR an object necessary to perform it
• parties are ill or dead
• temporary unavailability of an object

(2) performance is illegal

(3) a common purpose is frustrated (rare)

• this is despite the fact that the contract is still physically possible to carry out
• must be a JOINT purpose of both parties

Question 20

what are 4 limitations on the doctrine of frustration?

Answer 20

a contract CANNOT be frustrated if:

(1) it becomes more difficult or expensive to perform

(2) it cannot be performed because one party was at fault

(3) the event causing frustration was foreseeable

(4) express provision in the contract was made for the event

Question 21

what is the effect of frustration for:
(1) future obligations
(2) prior obligations

Answer 21

(1) frustration automatically discharges future obligations

(2) obligations arising before the frustrating event are dealt with by the Law Reform (Frustrated Contracts) Act 1943

Question 22

if money was paid before a frustrating event, what happens?

Answer 22

money paid before a frustrating event can be recovered by the party that paid it

Question 23

if money should have been paid before a frustrating event, what happens?

Answer 23

money that should have been paid before a frustrating event no longer needs to be paid

Question 24

if someone incurred expenses in performance of a contract before a frustrating event, what happens?

Answer 24

if a party incurred expenses under a contract before a frustrating event, the court can allow them to recover the amount payable

similarly

if a party was paid money under a frustrated contract and that party incurred expenses before the frustrating event, then the court may allow them to retain the amount of money to reflect expenses (but return the rest)

Question 25

what are the limitations to a party recovering expenses paid before a contract was frustrated? (3)

Answer 25

(1) amount cannot exceed the actual expenses incurred

(2) the amount cannot exceed the amount paid or payable before the frustrating event

(3) the recovery of expenses is at the discretion of the court as it thus just (so the sums may not be the actual expenses incurred)

Question 26

if a party received a non-monetary benefit before a frustrating event, what happens?

Answer 26

they may be required to pay a just sum for it at the court’s discretion

but the amount cannot exceed the value of the benefit obtained