Discharge

Question 1

In what ways can a contract be discharged?

Answer 1

• Performance
• Expiry
• Agreement
• Breach; or
• Frustration

Question 2

How is a contract discharged by expiry?

Answer 2

Will expire when it is completed according to its own terms; parties will often incorporate date when contract comes to an end, or specify the occurrence of an event (e.g. given time frame for delivery)

Question 3

What is the entire obligations rule?

Re discharge by performance

Answer 3

A contractual obligation is discharged by complete performance of the obligation; only when performance is entirely complete is it entitled to payment

A promisor who performs only part of obligation is not discharged

Cutter - Cutter agreed to serve on a ship from Jamaica to Livepool in return from Powerll for 30 guineas (4x going rate) provided he di his duty from hence to port of Liverpool - Cutter died at sea 7 weeks into voyage and 19 days short of Liverpool - widow brought action to recover proportion of agreed price - action failed; widow entitled to nothing as Cutter did not perform entire obligation

Question 4

What are the 4 exceptions to the entire obligations rule?

Answer 4

• Acceptance of partial performance
• Substantial performance
• Divisible obligations
• Wrongful prevention of performance

Question 5

For acceptance of partial performance, what must the acceptance be (and what can the situation not be), and what is the defaulting party entitled to?

Re exceptions for entire obligations rule

Answer 5

• At the innocent party’s discretion; must be a voluntary acceptance (not a ‘had no choice’ situation)
• Party in default entitled to payment on a quantum merit basis; as much as deserved (assessed objectively)

Sumpter - Sumpter agreed to build 2 houses w stables on Hedges’ land in return for fixed price, completed half of work for approx half contract price before running out of money, meaning Hedges’ completed himself…

• No voluntary acceptance - had no choice as he was in possession of what he could not fail to keep (on his land)
• No voluntary acceptance means Sumpter not entitled to.a quantum meruit to compensate for value of work done - but was entitled to compensation for value of materials he had left on site which innocent party used to complete work (as innocent party had a choice here)

Question 6

What is substantial performance? What is the performing party entitled to here?

Re exceptions for entire obligations rule

Answer 6

Where a contract has been substantially performed it is possible for the perfroming party to obtain the contract price with a deduction to reflect the cost of remedying the ‘defect’

Defect = aspect not performed

Question 7

What is the ‘defect’ in substantial performance? What happens if it is too serious?

Answer 7

• Defect = the aspect which has not been performed
• If too serious, party who rendered defective performance will not be entitled to recover any money

If not too serious - party who rendered substantive performance entitled to contract money subject to a deduction

Question 8

How does the court decide what is ‘substantial performance’?

Answer 8

Question is whether the defect goes to ‘the root of the contract’; viewed with regard to purpose of contract + circumstances as a whole

Compare:

• Hoenig: Redecoration/refurnishing job left some defects (£55 to remedy of £750 contract) = entitled to contract price - deduction for defects
• Bolton: Central heating installation did not work = contract - to install central heating system - not substantially performed and not entitled to recover contract price (unless he had offered to remedy defects)

Question 9

What are divisible obligations? For what is the performing party entitled to payment?

Re exceptions for entire obligations rule

Answer 9

Where contracts are clearly intended to be divided into parts (e.g. salary under fixed contract of employment)

Performing party entitled to payment for each part performed

Depends on intention of the parties

Question 10

What is the wrongful prevention of performance? What is the innocent party entitled to?

Re exceptions for entire obligations rule

Answer 10

Where one party peforms part of agreed obligation but is prevented from completing rest by fault of the other party = entitled to payment despite not having completed rest of obligation

Question 11

What are the two options of an innocent party upon wrongful prevention of performance?

Answer 11

1. Sue for damages for breach of contract
2. Claim a quantum meruit

Question 12

What is a tender of performance? What must promisor show?

Re defences to allegations of failure to perform

Answer 12

Promisor must show they unconditionally offered to perform their obligations in accordance with contract terms, but promisee refused to accept such peformance

A defence in an action for breach of contract for failing to perform obl

E.g. seller delivered goods but purchaser refused to accept delivery - seller relieved of liability for failing to deliver

Question 13

Can a tender of performance be used to discharge the payment of a debt?

Answer 13

No - but it would prevent the creditor from claiming interest/damages on debt subsequent to tender of performance

Question 14

How can a party discharge a contract by agreement?

2 ways

Answer 14

1. By a subsequent binding contract between the parties (mutual waiver); or
2. By operation of a term in the original contract

Question 15

What two elements are needed in a mutual waiver (subsequent binding contract) for it to be effective?

Very common in commercial situations where parties wish to end an existing contract and achieve commercial certainty. They will often agree the terms of a termination agreement to release and settle any liabilities under the original contract so that they can be sure that they will have no further liabilities or obligations arising from it in the future.

Answer 15

1. Accord (agreement that obligation will be released) and
2. Satisfaction (consideration for the promise to release a party from the obligation

Accord = A agrees to release B from obligations
Satisfaction = B agrees to release A from obligations

Question 16

How is a mutual waiver carried out when one party has performed their obligations in their entirety but the other party still has some remaining?

There can be no satisfaction…

B cannot meaningfully agree to release A from obligations under old contract if it has already performed them!

Answer 16

The obligee may release the other party by a subsequent agreement under deed = avoids need for consideration because a gratuitous promise is enforceable if made in a contract in the form of a deed

Question 17

What is the alternative to using a deed for a mutual waiver?

Answer 17

Accept something different as consideration in place of the former obligation e.g. accelerated payment of a sum payable in instalments or third party paying

Question 18

What will a term providing for the discharge of obligations in a contract be?

(Moving on from discharge by subsequent contract; this is other option)

Answer 18

Will either be:

• Condition precedent: condition which must be satisfied before any rights come into existence
• Condition subsequent: condition which, if satisfied, releases a party from binding obligations

Question 19

How does a condition precedent work? What happens if not fulfilled?

Answer 19

• If a contract is subject to a condition precedent = no rights come into existence and contract suspended until condition satisfied
• Where not fulfilled - rights and obligations were contingent on an event that never occurred (never came into existence in the first place)

E.g. company includes clause stipulating it is a condition precedent of a high value contract that approval provided by shareholders - if refuse to provide = contract never becomes binding

Question 20

How does a condition subsequent work?

Answer 20

Termination of contract/discharge from obligations occurs in the event of a specified occurrence

Common kind is a term providing the right for one or both parties to end agreement by giving notice to the other (condition transpires [notice given] and contract comes to an end)

Question 21

When does a repudiatory breach arise?

Answer 21

Where one party has breached a term of the contract which is either a condition or an innonimate term treated as a condition

NB not every breach gives party the right to terminate a contract, usual remedy will be compensatory damages

Question 22

What can an innocent party do when a repudiatory breach occurs?

Answer 22

Terminate or affirm the contract

No need for termination to be provided for in the contract

Question 23

What is an anticipatory breach?

Answer 23

Where a party indicates that they will not perform contractual obligation in advance of the date of performance

• A party doing this has ‘renounced’ the contract

Question 24

If a party wishes to rely on an anticipatory breach to terminate, what must it demonstrate?

Answer 24

If a party wants to rely on an anticipatory breach to terminate - it must demonstrate that if breach occurred at time of performance was due it would have been repudiatory

Indication it will not perform in a minor regard does not give rise

Question 25

What is the effect of terminating a contract for repudiatory breach on.. 1. Primary obligations remaining unperformed 2. The innocent's right to claim damages 3. Any rights/obligations which have accrued before termination (e.g. if customer owes fees for services provided prior to termination)

Answer 25

1. Puts an end to all primary obligations of parties remaining unperformed 2. Innocent party can claim damages arising not only from specific breach but **also loss of contract caused by termination** 3. Any rights/obligations which have accrued before termination **remain enforceable** (e.g. if customer owes fees for services provided prior to termination it would still be obliged to pay them); prospective only

Question 26

What is wrongful termination? What claim does the innocent party have?

Answer 26

* A gives notice to terminate with B on grounds of a breach by B it believes to be a breach of condition. * Later transpires breach was only a warranty and A had no right to terminate * B now has a **damages claim against A as they are actually in repudiatory breach** ## Footnote Unless term which has been breached has been defined as condition, the categorisation of term depends on the application of the Hong Kong Fir test (high bar!)

Question 27

In the case of wrongful termination, is it a defence that the terminator acted in good faith?

Answer 27

No - even if they believed that the 'breach' justified the remedial action taken

Question 28

What is the right of election? If it is exercised, what must the innocent party do?

Answer 28

Where there has been a repudiatory breach of contract, the contract is terminated **only if aggrieved party makes the election (choice) to treat breach as repudiating the contract** Innocent party must make decision to terminate contract known to party in default | Innocent party allowed period of time to decide between two

Question 29

What are the benefits of affirmation | Affirm = contract survives, innocent party rights preserved

Answer 29

* Allows innocent party to continue with major project; contractor can finish * Financially better: right to charge contractual charges as a debt v (uncertain) value of damages * Can perform own obligations and claim sum due under contract in debt action (where party indicates intention not to perform)

Question 30

If a contract is affirmed, what happens to the claim for damages? What would that claim **not** include?

Answer 30

* **Claim for damages arising from breach is retained** but innocent party cannot terminate as a result of it * This means that damages would not include compensation for loss of performance/of contract as a whole | Election is not a waiver of damages from relevant breach

Question 31

How is a contract affirmed by an innocent party?

Answer 31

Must be evidence of a very clear and unequivocal commitment to continuing with contract

Question 32

What are the 2 limitations on affirming a contract in response to a repudiatory breach? | What is required? Legitimate interest...

Answer 32

1. The **cooperation of the breaching party** is required for continued performance of the contract 2. The innocent party has **no 'legitimate interest, financial or otherwise'** in affirming contract and continuing with performance (can only operate if shown that i) damages are adequate remedy and ii) keeping contract alive would be unreasonable) | Only in extreme cases will innocent party not have legitimate interest

Question 33

What is frustration?

Answer 33

Refers to events **beyond control of the parties** occurring **after contract formation** which render performance **radically different** from that agreed to at time contract formed

Question 34

What is the effect of frustration?

Answer 34

* Relieves party from further obligation under contract (do not have to meet radically different obligations) * Contract brought to an end automatically and parties have no choice in matter | Can be raised as a defence to an action for breach of contract

Question 35

What renders performance radically different? | 3 things

Answer 35

* Performance is **impossible** * Performance is **illegal**; or * **Common purpose** of the contract is frustrated | Not exhaustive and may overlap ## Footnote Illegal example Fibrosa - contract for sale of machinery provided it to be shipped to port in Poland which was occupied by enemy during WW2 - performing obligation would have been illegal

Question 36

What makes performance impossible? | 3 things ## Footnote Total/partial ______, _______ of party , _________

Answer 36

* **Total/partial destruction of the subject matter** of the contract (music hall Cs were granted a licence to use) or something essential for performance of contract (contract to install machinery in factory frustrated when factory caught on fire) * **Death/illness of one of the parties in a personal contract**; especially where specified individual engaged to render a particular service (drummer in band taken ill and only capable of working 3-4 nights a week when group had engagements for 7 nights a week) * **Unavailability** e.g. ship requisitioned for 5 months out of a year's charterparty

Question 37

Will unavailability always make performance impossible?

Answer 37

No E.g. **Tamplin**: a requisition of a ship for war did not frustrate a five year charterparty as the war would be over soon and a considerable amount of charterparty would remain The amount of time left to run in contract is only a **starting point** to determine frustration ## Footnote NB re unavailability a 'multifactorial approach' to decide whether unavailability can amount to frustration: terms, content, party's knowledge or expectaions, risk

Question 38

When is the common purpose of the contract frustrated? What happens if it can still be physically carried out?

Answer 38

When the **joint** (not one party's) purpose is frustrated even when it is **still physically possible** to carry out contract | Not enough that it is **one** party's purpose! ## Footnote **Krell** - room hired for purpose of viewing coronation procession but no provision of this in contract - processions did not go ahead as planned - court held that purpose had been frustrated as *both parties understood only purpose of hiring rooms was to have a view of procession * **Herne** - steamboat hired to D for purpose of viewing Naval Review and cruise around fleet - review cancelled but cruise could still go ahead = contract not frustrated (even if principal motivation - naval review - is) - *would have been if this was sole express purpose* **Canary Wharf** - EMA argued lease of HQ premises had been frustrated when it was forced by Brexit to move to Amsterdam - court found no common purpose which was frustrated and parties had divergent purposes when they entered into bargain set out in lease (EMA wanted flexibility as to exit and low rent, landlord wantd secure long term cash flow opportunity) and had bargained with possibility that EMA might not fulfil full term

Question 39

What does **not** count as frustration? ## Footnote Increase...., caused....,, could reasonably have _____ , provided for

Answer 39

* Mere increse in expense/onerousness * Something caused by the default of a party * Something which the parties could reasonably have contemplated * Something provided for in the contract

Question 40

Will a contract which becomes more difficult/expensive to perform mean it has become frustrated? ## Footnote Davis - 78 houses in 8 months for Council - due to lack of skilled labour, bad weather and shortages of material, work took longer and contractors incurred additional cost of £17,600 on top

Answer 40

No - an uexpected turn of events rendering a contract more onerous will not itself amount to frustration

Question 41

What is is self-frustration, how is it proved and what is the result if it is proved?

Answer 41

* Where frustrating event was induced by one of the parties * For the party alleging self-induced frustration to prove that it is - if they succeed = defence of frustration fails and D in breach of contract ## Footnote E.g. **Super Servant Two** - Ds could choose Super Servant One or Two to transport C's oil rig, chose Two and, before performance, contracted One in another contract. Two sank and Ds could obviously not use One. This was self-induced frustration as D's choice to allocate One to other contracts

Question 42

How do foreseeable events limit the doctrine of frustration?

Answer 42

If you could have foreseen an event, but failed to make a provision for it in your contract, frustration is less likely to apply ## Footnote **Flying Music Company** - Greek economic crisis/civil unrest could not amount to frustration because contract was made when there wer already signs of unrest

Question 43

What is the key test for foreseeability of events in frustration? Will parties be scrutinised for every theoretical possibility?

Answer 43

* Whether the event would have informed the manner in which the parties assessed the risk of entering into contract * Will be many cases where something can be foreseen as theoretical possibility, but neither party will be criticised for failing to take into account

Question 44

What express contractual provision can be used to limit frustration? What is the impact of its inclusion?

Answer 44

Frustration cannot override express provision for frustrating event, like a **force majure clause**: states what happens to contractual relationship should a particular set of circumstances materialise * Can allow for continuance of relationship in circumstances that would otherwise amount to frustration; unlikely to be able to rely on frustration where risk already provided for by force majure

Question 45

What are the consequences of frustration on future and prior obligations?

Answer 45

* All **future obligations** are automatically discharged by common law * Obligations **prior to frustrating event** are dealt with by the Law Reform (Frustrated Contracts) Act 1943

Question 46

What happens to money that has been paid, money that should have been paid in the event of frustration?

Answer 46

* Money **paid** before the frustrating event can be recovered * Money that **should have been paid (i.e. that which was outstanding)** before the frustrating event no longer needs to be paid

Question 47

For expenses incurred by payee (usually supplier) before frustrating event which can be recovered, what must the expenses be and what can the amount recovered not exceed? ## Footnote Expenses incurred here means **the costs in attempting to perform the contract**. The payee will want to retain a sum of this once the contract has been frustrated; the contract cannot be completed so they are ultimately wasting their money

Answer 47

* Expenses incurred must be **directly related to attempt to perform** * Amount retained/recovered cannot exceed i) **actual** expenses incurred and ii) amount **paid** (e.g. advance payments) or **payable** prior to frustrating event | Recovery of expenses at discretion of court ## Footnote Sum retained/recovered to account for expenses may not be actual expenses but only what court considers to be a just sum having regard to all circumstances

Question 48

How does a judge decide what would be just to allow a supplier to maintain? What about benefits gained by a party before frustrating event?

Answer 48

- Broad discretion; provided it **does not exceed actual expenses incurred/sums paid or payable in advance of frustrating event**

Question 49

What is a 'valuable benefit' and what happens if a party gains one under a contract before frustrating event?

Answer 49

* Valuable benefit = **end product of the C's services**, not the services themselves * Party who gained a **valuable benefit** under contract before frustrating event may be required to pay just sum for it (where the value of the benefit has been reduced to nil by frustrating event = the provider of the 'benefit' has no claim) ## Footnote **BP v Hunt**: BP provided expertise in finding and extracting oil on Hunt's land - BP's half stake appropriated by Libyan GOV - 'benefit' meant the **end product of the C's services** and not the services themselves (in this case the end product was Hunt's stake which was significantly devalued by expropriation of Libyan GOV also)