What are the four ways of discharging a contract?
(a) Performance
(b) Agreement
(c) Frustration
(d) Breach
How is a contract discharged by agreement? Instead of performing the contract, the parties may
agree to cancel the contract before it has been completely performed on both sides.
What is a bilateral discharge? If there are unperformed obligations of the original contract on
both sides, each party provides consideration for his own release by agreeing to release the other
What is a unilateral discharge? But if one party has completely performed his obligations,
his agreement to release the other from his obligations (unilateral discharge) requires
consideration, such as payment of a cancellation fee (this is called accord and satisfaction).
What is novation of the old contract? If the parties enter into a new contract to replace the
unperformed contract, the new contract provides any necessary consideration. This is called
novation of the old contract - it is replaced by a new one.
Condition precedent A contract may include provision for its own discharge by imposing a
condition precedent, which prevents the contract from coming into operation unless the condition
is satisfied.
Condition subsequent Alternatively, it may impose a condition subsequent by which the contract
is discharged on the later happening of an event. A simple example of this is provision for
termination by notice given by one party to the other.
Frustration 'The term frustration refers to the discharge of a contract by some outside event
for which neither party is responsible which makes further performance impossible. It must be
some fundamental change in circumstances such as the accidental destruction of the subject-
matter upon which the contract depends.
Destruction of the subject matter - in frustration The subject matter of the contract was
destroyed before
performance fell due.
Personal incapacity to perform a contract of personal service - frustration The principle that a
physical thing must be available applies equally to a person, if that person's presence is a
fundamental requirement. Not every illness will discharge a contract of personal service -
personal incapacity must be established.
Government intervention - frustration Government intervention is a common cause of
frustration, particularly in time of war. If maintenance of the contract would impose upon the
parties a contract fundamentally different from that which they made, the contract
is discharged.
Supervening illegality - in frustration Further performance of the contract becomes illegal - for
example the
outbreak of war.
Non-occurrence of an event if it is the sole purpose of the contract - in frustration Read
corronation cases
When is a contract not discharged by frustration (a) If an alternative mode of performance is
possible.
(b) If performance becomes suddenly more expensive.
(c) If one party has accepted the risk that he will be unable to perform.
(d) If one party has induced frustration by his own choice between alternatives.
The Law Reform Act 1943 (frustrated contracts) The common law consequences of
frustration are modified by the Law Reform (Frustrated Contracts) Act 1943, which regulates the
rights and obligations of the parties to a contract discharged by frustration.
... In most cases now the rights and liabilities of parties to a contract discharged by
frustration are regulated by the Law Reform (Frustrated Contracts) Act 1943 as follows.
(a) Any money paid under the contract by one party to the other is to be repaid.
(b) Any sums due for payment under the contract then or later cease to be payable.
(c) If a person has to repay money under (a), or if he must forego payment earned, he may be
able (at the court's discretion) to recover or set off expenses incurred up to the time the contract
was frustrated.
(d) If either party has obtained a valuable benefit (other than payment of money) under the
contract before it is discharged, the court may in its discretion order him to pay to the other party
all or part
of that value.
Breach of contract A party is said to be in breach of contract where, without lawful excuse, he
does not perform his contractual obligations precisely.
What are lawful excuses not to perform contractual obligations? A person sometimes has a
lawful excuse not to perform contractual obligations.
Performance is impossible, perhaps because of some unforeseeable event.
He has tendered performance but this has been rejected.
The other party has made it impossible for him to perform.
The contract has been discharged through frustration.
The parties have by agreement permitted non-performance.
What are the two obligations that a breach of contract gives rise to?the primary obligation to
perform the contract's terms
a secondary obligation to pay damages to the other party
When does the primary obligation falter? (a) Where the party in default has repudiated the
contract, either before performance is due or before the contract has been fully performed.
(b) Where the party in default has committed a fundamental breach.
Repudiatory breach - types of breaches A repudiatory breach occurs where a party
indicates, either by words or by conduct, that he does not intend to honour his contractual
obligations. A repudiatory breach is a serious actual breach of contract.
What can the receiving party do in case of a repudiatory breach? (a) He can elect to treat the
contract as repudiated by the other, recover damages and treat himself as being discharged from
his primary obligations under the contract.
(b) He can elect to affirm the contract.
When does a repudiatory breach give rise to a either right to terminate or to affirm? A right
either to terminate or to affirm arises in the following circumstances.
(a) Refusal to perform (renunciation). One party renounces his contractual obligations by
showing that
he has no intention to perform them: Hochster v De la Tour 1853
(b) Failure to perform an entire obligation. An entire obligation is said to be one where complete
and precise performance of it is a precondition of the other party's performance.
(c) Incapacitation. Where a party prevents himself from performing his contractual obligations
he is
treated as if he refused to perform them. For instance, where A sells a thing to C even though he
promised to sell it to B he is in repudiatory breach of his contract with B.
Do genuine mistakes repudiate a contract? Genuine mistakes, even to one party's detriment,
will not necessarily repudiate a contract. This was the decision in
Vaswani Motors (Sales and Services) Ltd 1996.
What is an anticipatory breach? Anticipatory breach - one party declares in advance that
they will not perform their side of the bargain
when the time for performance arrives
Does breach of a warranty repudiate a contract? No. Only a breach of a condition counts as a
repudiation.
What can the other party do? The other party may treat this as anticipatory breach and treat the
contract as discharged forthwith, or allow the contract to continue until there is an actual breach
Termination for repudiatory breach To terminate for repudiatory breach the innocent party must
notify the other of his decision. This may be by way of refusal to accept defects in performance,
refusal to accept further performance or refusal to perform his own obligations.
Rights of the innocent party (a) He is not bound by his future or continuing contractual
obligations, and cannot be sued on them.
(b) He need not accept nor pay for further performance.
(c) He can refuse to pay for partial or defective performance already received.
(d) He can reclaim money paid to a defaulter if he can and does reject defective performance.
(e) He is not discharged from the contractual obligations which were due at the time of
termination.
Affirmation after repudiatory breach If a person is aware of the other party's repudiatory breach
and of his own right to terminate the contract as a result but still decides to treat the contract as
being in existence he is said to have affirmed the contract. The
contract remains fully in force.
What are damages? Damages are a common law remedy and are primarily intended to restore
the party who has suffered loss to the
same position he would have been in if the contract had been performed.
Considerations of Damage In a claim for damages the first issue is remoteness of damage.
Here the courts consider how far down the sequence of cause and effect the consequences of
breach should be traced before they should be ignored.
Secondly, the court must decide how much money to award in respect of the breach and its
relevant consequences. This is the measure of damages.
Remoteness of Damage Remoteness of damage is tested by the two limbs of the rule in
Hadley v Baxendale 1854.
The first part of the rule states that the loss must arise either naturally from the breach
(according to the usual course of things), or in a manner which the parties may reasonably have
contemplated as a
probable result of a breach.
The second part of the rule provides that a loss outside the usual course of events will only be
compensated if the exceptional circumstances which caused it were within the defendant's actual
or constructive knowledge when they made the contract.
When is the defendant liable? The defendant is liable only if he knew of the special
circumstances from which the abnormal consequence of breach could arise.
Consequential loss Parties may seek to limit liability by excluding consequential loss, in other
words, loss or damage that occurs indirectly from breach of contract. Such exclusion clauses can
be allowed under UCTA 1977 if the contract is a commercial one
Measure of damages The measure of damages is that which will compensate for the loss
incurred. It is not intended that the injured
party should profit from a claim.
As a general rule the amount awarded as damages is what is needed to put the claimant in the
position he would have achieved if the contract had been performed. This is also referred to as
protecting the claimant's expectation interest.
Mitigation of loss In assessing the amount of damages it is assumed that the claimant will
take any reasonable steps to reduce or mitigate his loss. The burden of proof is on the defendant
to show that the claimant failed to take a reasonable opportunity of mitigation.
Contributory negligence Where a duty of care exists, in addition to a contractual obligation,
a claimant's damages may be reduced where they demonstrated some contributory negligence.
In Platform Home Loans Ltd v Oystonshipways Ltd 1999, a
surveyor was sued for an over-valuation of a property. However the claim was reduced as some
of the claimant's
losses were caused by them taking the property as security for a particularly risky loan. The
losses were not all
down to the over-valuation.
Liquidated damages Liquidated damages can be defined as 'a fixed or ascertainable sum agreed
by the parties at the time of
contracting, payable in the event of a breach, for example, an amount payable per day for failure
to complete a
building. If they are a genuine attempt to pre-estimate the likely loss, the court will enforce
payment.'
Limitation Act 1980 The right to sue for breach of contract becomes statute-barred after six
years from the date on which the cause of
action accrued: s 5 Limitation Act 1980. The period is twelve years if the contract is by deed.
In which situations does the six year period begins not at the date of the breach but later? In
three situations the six year period begins not at the date of the breach but later.
(a) If the claimant is a minor or under some other contractual disability (eg of unsound mind) at
the time of
the breach of contract, the six year period begins to run only when his disability ceases or he
dies.
(b) If the defendant or his agent conceals the right of action by fraud or if the action is for relief
from
the results of a mistake, the six year period begins to run only when the claimant discovered or
could by reasonable diligence have discovered the fraud, concealment or mistake: s 32
Limitation
Act 1980. An innocent third party who acquired property which is affected by these rules is
protected
against any action in respect of them: s 32(4).
(c) The normal period of six years can be extended where information relevant to the possible
claims is
deliberately concealed after the period of six years has started to run.
When does the Limitation Act not apply? Where the claim can only be for specific
performance or injunction, the Limitation Act 1980 does not apply.
Instead, the claim may be limited by the equitable doctrine of delay or 'laches'. This doctrine
means that the party
seeking an equitable remedy has a very limited time to do so. There is no rule on how much time
a claimant has
to claim, the amount will largely be governed by what is reasonable in the circumstances.
Extension of the Limited Act The limitation period may be extended if the debt, or any other
certain monetary amount, is either acknowledged
or paid in part before the original six (or twelve) years has expired: s 29.
Hence if a debt accrues on 1.1.2010, the
original limitation period expires on 31.12.2015. But if part-payment is received on 1.1.2011, the
debt is reinstated
and does not then become 'statute-barred' until 31.12.2016.
(a) The claim must be acknowledged as existing, not just as possible, but it need not be
quantified. It
must be in writing, signed by the debtor and addressed to the creditor: s 30.
(b) To be effective, the part payment must be identifiable with the particular debt, not just a
payment on a running account.
Penalty clause A contractual term designed as a penalty clause to discourage breach is void and
not enforceable. Such terms are
not a genuine pre-estimate of losses and are inserted in terrorem of the party in breach and to
pressurise them to perform or be liable for substantial losses that they would otherwise not be
liable for. Relief from penalty clauses is an example of the influence of equity in the law of
contract, and has most frequently been seen in consumer credit cases.
Remedies for buyers Where the seller is in breach of contract, the buyer has the following
remedies.
Reject the goods
Claim damages for the price of the goods
Claim damages for non-acceptance (where appropriate)
Remedies for sellers The Sale of Goods Act 1979 gives the seller rights over the goods sold.
(a) Lien
If the goods are in the seller's possession, they may hold on to them until payment is received.
(b) Stoppage in transit
Where the buyer is insolvent, the seller has the right to stop delivery whilst the goods are being
transported so they can be recovered.
(c) Rescind and resell
If the contract allows, or if the buyer is notified, the seller may rescind the contract and resell the
goods if payment is not received in a reasonable time.
Romalpa clauses These are not remedies but an attempt to protect the seller by using
contract terms. They are 'reservation of title' clauses which state that ownership of the goods will
not pass to the buyer until they are paid for. Such clauses mean that in the event of the buyer's
insolvency, the goods can be recovered rather than the seller becoming an unsecured creditor.
Matters become complicated where the goods have been sold on to a third party or are mixed
with other goods.
Common Law Remedies Action for the price and Quantum meruit are common law
remedies
Action for the price If the breach of contract arises out of one party's failure to pay the
contractually agreed price due under the contract, the creditor should bring a personal action
against the debtor to recover that sum. This is a fairly straightforward procedure but is subject to
two specific limitations.
The first is that an action for the price under a contract for the sale of goods may only be brought
if property has passed to the buyer, unless the price has been agreed to be payable on a specific
date: s 49 Sale of Goods Act 1979.
Secondly, whilst the injured party may recover an agreed sum due at the time of an anticipatory
breach, sums which become due after the anticipatory breach may not be recovered unless he
affirms the contract.
Quantum meruit A quantum meruit is a claim which is available as an alternative to
damages. The injured party in a breach of a contract may claim the value of his work. The aim of
such an award is to restore the claimant to the position they would have been in had the contract
never been made. It is a restitutory award.
Quantum meruit is likely to be sought where one party has already performed part of his
obligations and the other party then repudiates the contract.
Because it is restitutory, a quantum meruit award is usually for a smaller amount than an award
of damages. However where only nominal damages would be awarded (say because the claimant
would not have been able to
perform the contract anyway) a quantum meruit claim would still be available and would yield a
higher amount.
Equitable remedies Specific performance
Injunction
Rescission
Specific performance The party in breach is ordered to perform their side of the contract. Such
an order is only made where damages are inadequate compensation, such as in a sale of land, and
where actual consideration has passed. However, for items with no special features, specific
performance will not be given, as damages would be a sufficient remedy.
When is the order for specific performance not made The order will not be made if it
would require performance over a period of time and the court could not ensure that the
defendant did comply fully with the order. Therefore specific performance is not ordered for
contracts of
employment or personal service nor usually for building contracts.
Injunction An injunction is an equitable remedy which requires that a negative condition in
the agreement be fulfilled.
An injunction is limited to enforcement of contract terms which are in substance negative
restraints. In other words, if a contract specifies acts which a party should not perform, an
injunction can be granted to prevent them performing those acts.
Rescission Rescinding a contract means that it is cancelled or rejected and the parties are
restored to their pre-contract condition. It is a right
which exists in certain circumstances, such as where a contract is voidable for misrepresentation.
Four conditions for rescissionIt must be possible for each party to be returned to their pre-
contract condition (restitutio in
integrum).
An innocent third party who has acquired rights in the subject matter of the contract will prevent
the
original transaction being rescinded.
The right to rescission must be exercised within a reasonable time of it arising.
Where a person affirms a contract expressly or by conduct it may not then be rescinded.
