How a contract may be discharged

There are four ways in which a contract may be discharged as follows:-

performance (i.e. fulfilling and complying with all the contract terms)

agreement (i.e. the parties agree to discharge the contract – be careful, as both parties must usually give consideration for the agreement to discharge to be legally binding)

breach (i.e. not complying with/fulfilling the contractual term(s) as required by virtue of the contract)

frustration (i.e. the contract becoming impossible but due to no fault of any party – but please see below)

1. Performance

General rule = all the terms of the contract must be precisely completed to discharge liability.

There are however several exceptions to this rule:

i) Divisible contracts

An entire contract requires complete performance by either or both parties, usually there is an express provision saying that the contract is entire and no part of the contract may be severed.

A divisible contract is where there are several amounts of consideration and upon performance of one stage the party is entitled to payment of that amount. Therefore with a divisible contract it is arguable that performance of certain elements within the contract entitle that party to part payment. A simple example of this would be where there is payment for the delivery of goods and installation where there are completely separate amounts “payable on delivery" and “payable on completion of installation". It is not always this simple though!

See the following contrasting cases:-

C contracted to construct two houses and stables for £565. C carried out work to the value of about £333, but did not complete the works and refused to finish the work. The other party ended up completing the buildings because of C’s refusal. C could not sue for £333, as he had failed to fulfill all the terms of the contract and the contract was indivisible.

Sumpter v Hedges [1898]

A shipwright agreed to undertake repairs to a ship, but there was no agreement on what was payable when. The shipwright refused to do any works whatsoever until he received some of the monies due. It was held that the shipwright was not bound to complete the repairs before claiming some payment.

Why is this? – Although there is no real difference as such between this case and the last one, you could say that it is a commercial reality/custom that some payment would be made at the start to buy materials.

Roberts v Havelock (1832)

ii) Acceptance of partial performance

If a party accepts partial performance he must pay a “reasonable price" for that partial performance. This acceptance of the partial performance however must be freely agreed, so there must not have been force, duress, etc. Effectively there must have been a new agreement that partial payment would be made.

A ship could not deliver goods in Hamburg port (as required under the contract) due to no fault of either party. The party awaiting delivery of the goods agreed with the ship owners that delivery could take place at another port. A contract was implied from the agreement to deliver elsewhere and therefore the ship owners were entitled to payment.

Christy v Row [1808]

iii) Completion prevented by promisee

If a party is prevented by the other party from performing all terms under the contract, then a quantum meruit action in quasi-contract may be brought (i.e. a reasonable price is paid for the work actually done even though it would not normally amount to fulfilling all the terms).

Here C had contracted with a published to write a book. However the publisher later decided it would not publish the book. The writer was entitled to reasonable payment on a quantum meruit basis.

Planche v Colburn [1831]

iv) Substantial performance

Where there has been substantial performance and there have only been minor defects usually the contract price is payable less a sum for the defects.

In this case there were only minor building defects.

Dakin v Lee [1916]

v) Tender of Performance

This occurs if the first party needs the other party’s help to complete the contract, but the other party refuses.

Here the other party refused to accept delivery, but it was held that attempted delivery amounted to substantial performance. [This is similar to the “performance prevented by the other party" situation].

Startup v M'Donald [1843]

Is time of the essence in a contract?

s41 Law of Property Act 1925 confirms time is generally not of the essence and therefore delay only entitles a party to damages unless:-

i) express provision stating that ‘time is of the essence’ (i.e. the contract contains an express time).

ii) notice has been given by either or both parties to the other while the contract is being carried out (e.g. “I give you notice that time is now of the essence", etc.)

iii) due to the circumstances in which the contract is made or from the subject matter of the contract time is of the essence (e.g. shares which fluctuate very quickly are being bought).

2. Agreement

Bilateral Discharge (i.e. discharge by both parties)

How can contracts be terminated?

Accord and Satisfaction – each agrees to release the other from their liabilities under the contract

Rescission and Satisfaction – the parties rescind the first contract and replace it with a new contract (the parties could alternatively vary the contract).

Variation of the original contract – Note: to be binding there should be consideration or the parties should enter into a deed.

Waiver (e.g. a party agrees expressly or by conduct they will not enforce their legal rights)

Unilateral Discharge

1. Release the other party from performance – this should be by deed or in return for consideration

2. ‘Accord and satisfaction’ is also possible (e.g. the part payment of a debt).

3. Breach

A breach = a failure to perform one or more terms of a contract.

A serious breach entitles the other party to treat the contract as discharged. How?

Either party may expressly or from conduct at a point before performance is required state he does not intend to fulfill his obligations under the contract (= an anticipatory breach); or

He may in fact breach the contract that amounts to a substantial breach.

Anticipatory Breach

What is the other party entitled to do once he is informed of an anticipatory breach?

He may either accept the breach (thereby bringing the contract to an end entitling the party to claim a remedy); or

Affirm the contract (thereby allowing the contract to continue – perhaps waiving the breach).

Note that a party who does nothing may be impliedly waiving their right to a remedy, especially if nothing is done for a long time – Panchaud Freres SA v Establishments General Grain Co [1970].

Always remember that estoppel may also be brought in here.

An innocent party is not required to wait until the breach to bring an action – Hochster v De La Tour [1853].

If the innocent party affirms the contract after an anticipatory breach, he still has to complete his own part of the bargain under the contract.

This case said that it is necessary to see if there has been “an absolute refusal to perform the contract". If so, consider whether the innocent party entitled not to perform his part of the contract.

Lord Selborne stated in Mersey Steel v Naylor Benzon (1884)

Remember to apply the rules on the effect of a breach i.e. a breach of a warranty is treated as less serious than a breach of condition and the remedies are accordingly very different.

Frustration

Frustration covers situations where the contract has become impossible to perform or it has lost its commercial purpose, but neither party caused the frustration.

Two alternative tests exist for frustration:

(1) The implied term test

Caldwell contracted to allow Taylor to use a hall for concerts. However in the meantime a fire destroyed the hall. It was held that the claim for breach of contract fails, as the fire caused the purpose to be fulfilled through no fault of either party. Here the contract depended upon the existence of an object and as the object no longer existed there was frustration.

Taylor v Caldwell [1863]

This case suggested that where the parties would have agreed that upon the occurrence of the matter in question the parties would consider the contract at an end.

Lord Loreburn in FA Tamplin v Anglo-Mexican Petroleum [1916]

(2) The radical change in the obligation test.

The 'radical change in the obligation' test in this case was:-

1. Look at the contract in light of the contract and surrounding circumstances when it is first entered into.

2. Look at the new circumstances and consider what would happen if the contractual terms were applied to these new circumstances.

3. Compare the two contractual obligations and see if there is a radical or fundamental change.

Lords Reid and Radcliffe in Davis Contractors v Fareham UDC [1956]

Lord Wilberforce said the test to be applied (out of the two) is the one that is fairest to the particular circumstances of the case in question.

National Carriers v Panalpina [1981]

2. Examples of frustrated contracts

i) Destruction of the specific subject matter of the contract

The destruction of the specific object required for performance of the contract frustrates it where without the object the contract cannot take place.

Taylor v Caldwell [1863]

ii) Personal Incapacity of one of the parties

A drummer was contracted to work every day, but due to illness could only work four nights a week. The drummer’s contract had been frustrated, because the commercial purpose could no longer be fulfilled, as it was necessary to employ another drummer.

Condor v The Baron Knights [1966]

iii) Non–occurrence of an event

An event may frustrate the contract if it is not caused by either party and could not be anticipated beforehand (e.g. a fire/lightning/flooding, etc.).

A room was hired to view the coronation of Edward VII, but it was postponed. Both parties knew the whole purpose of the contract was to watch the coronation and as it was not held the contract was frustrated.

Krell v Henry [1903]

Here Herne Bay contracted to hire a boat to take passenger to see a naval event which was to occur because of the coronation. However the coronation did not take place. The contract had not been frustrated, as there were two purposes for the contract and one was still possible i.e. to transport passengers around and this was still possible albeit a lot more unprofitably.

Herne Bay Steamboat Co v Hutton [1903]

iv) Government interference

Here Kerr agreed to build a reservoir and started 2 years of work, but due to a wartime statute had to stop work for what turned out to be 6 years in total (although due to uncertainty of war the amount of time work would have to be halted for was not known at the time). There was frustration, as the nature of the contract had completely changed.

Metropolitan Water Board v Dick Kerr [1918]

v) Subsequent illegality

This case concerned the supply of wheat. Due to wartime the government later passed legislation acquiring all rights in wheat. If the supplier had supplied the wheat it would have been illegal, therefore frustration had taken place.

Re Shipton, Anderson and Harrison Brothers [1915]

vi) Delay

A long and unexpected delay may frustrate a contract – Jackson v Union Marine Insurance [1873]

3. Limits on the doctrine

Note the following general principles regarding limitations of the doctrine:-

i) Express provision overrides the common law/equity

ii) Increase in costs/loss of profit/more difficulty in performing a contract is not sufficient – it must be impossible to carry out the contract, rather than merely more difficult

The House of Lords held that unforeseen events that make a contract more onerous than previously anticipated did not frustrate it if it was still possible to complete it.

- This only really restates that the fact that a contract becomes more difficult to complete than previously anticipated does not mean there is frustration.

Davis Contractors v Fareham UDC [1956]

iii) The frustrating event must not have been self-induced.

- For example in Maritime National Fish v Ocean Trawlers [1935] the charterer chose a charting licence for one contract over another. Although they could have argued illegality, the fact that there would have been illegality through their own fault. They really should not have entered into the contract in the first place!

4. Effects of the doctrine

Law Reform (Frustrated Contracts) Act 1943 provides that losses may be divided between the parties as the court sees fit where frustration discharges a contract.

Section 1(2) provides three rules:

Money paid prior to the frustrating event is recoverable, and

Money payable prior to the frustrating event is not longer payable

If the party who would have been due money incurred losses prior to performing the contract, the court may award that party such expenses up to the limit of the money paid/payable before the frustrating event.

A pop concert was due at a stadium, but it was later declared unsafe and could not legally be used. No alternative venue was available and the concert could not take place. Both parties had incurred costs - the pop concert promoters had paid the defendants $412,500 for the venue and naturally wanted to recover these monies relying on s1(2) of the 1943 Act.

The stadium owners counterclaimed for breach of contract by the promoters in failing to secure the permit for the concert. The fact the stadium was declared unsafe was the frustrating event, not the lack of the permit and the counterclaim was dismissed. In addition no deduction was given.

Walton Harvey Ltd v Gamerco v ICM/Fair Warning (Agency) Ltd [1995]

(ii) Valuable benefit

Section 1(3) provides: “If one party has, by reason of anything done by the other party in performance of the contract, obtained a valuable benefit (other than money) before the frustrating event, he may be ordered to pay a sum in respect of it, if the court considers it just, having regard to all the circumstances of the case."

Hunt had a contract with the Libyan government to search for oil in Libya. BP financed him in return for a share in profits. When oil was found the government claimed all rights in it, therefore only the Libyan government had any title to the oil. BP had spent $87 million in the search for the oil. BP was awarded $35 million recognising the partial performance of the contract which had given a valuable benefit to the other party.

BP Exploration v Hunt [1982]

You will see from the cases above that the powers are discretionary and the courts will try and achieve fairness between the parties where there has been frustration.

iii) Section 2(5) of the Act provides that the Act does not apply to:

- Contracts with express (or implied) provisions which to deal with the frustrating event;

- Most charterparties;

- Contracts governing the transportation of goods by sea;

- Insurance contracts;

- Contracts for the sale of certain perishable goods, which perish before the buyer assumes the risk of the goods (This is probably because the seller is most likely at fault and can recover the monies on insurance).