Discharge of contracts
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Discharge of contracts Law of Contract LW1154 BCL 2005-2006 1 Books Clark chapter 18 McDermott chapters 19-21 2 Introduction: When is performance due? 3 The problem Suppose a contract has been made … … and one party is concerned that the other might not perform What is the earliest point at which legal action lies for non-performance? The parties can specify exactly when the performance falls due But what if they do not? 4 Full performance by plaintiff The plaintiff's position is strongest if s/he has fully performed If the other party should have paid money, then there is an action for that precise sum If the other party should have provided property or services, then they can be sued for damages, or perhaps for an order for specific performance 5 But if neither side has performed ... … then we must determine the relationship between the two performances 1. The two performances may be independent ... 2. … or dependent on one another … 3. … or one may be a condition precedent to the other 6 “Independent promises” Each side must perform regardless of the other Non-performance by the other is no defence This may be agreed expressly … … and is the normal presumption in landlord-and-tenant law 7 “Dependent promises” Each is bound to perform only if the other does One side can enforce only if they are themselves ready and willing to perform This is the normal presumption where simultaneous performance is possible … … eg sale of goods 8 Sale of Goods Act 1893 s 28 Unless otherwise agreed, delivery of the goods and payment of the price are concurrent conditions, that is to say, the seller must be ready and willing to give possession of the goods to the buyer in exchange for the price, and the buyer must be ready and willing to pay the price in exchange for possession of the goods. 9 “Condition precedent” One side is bound to perform immediately … … but the other need not perform until the first does This is the presumption where simultaneous performance is impossible 10 Example Trans Trust v. Danubian Trading [1952] 2 QB 297 International sale of steel Seller to perform by supplying appropriate shipping documents to buyer’s bank Buyer to perform by arranging for the bank to pay against those documents Obviously seller could not perform until buyer had performed 11 “Condition precedent” Hence the general notion of the “entire contract” … … under which one side must perform, but the other need only pay on completion … Partial performance earns nothing This the presumption for contracts involving services 12 Example Cutter v. Powell (1795) 101 ER 573 Undertaking by a sailor to serve on a voyage from Jamaica to Liverpool Payment 30 guineas, but only if he completed the voyage He died in the course of the voyage His widow could recover nothing 13 Example Cutter v. Powell (1795) 101 ER 573 However, It is not clear what the reasoning was Legislation would now reach a different result on the facts Yet the general principle is correct … … particularly if the rate paid under the contract is a high one 14 “Entire contracts” Avoidance of the rule: 1. The courts sometimes hold that substantial performance is enough to earn payment; or 2. The court may sever the contract into smaller pieces 15 “Substantial performance” Payment of the contract price is subject to a condition precedent, that the other side should substantially perform So nothing is due if the work is not substantially finished If it is, then the price is due … … though the other side may sue for any uncompleted aspects 16 Example 1 Hoenig v. Isaacs [1952] 2 All ER 175 Contract to redecorate a flat for £750 The work was done, except for minor defects (which would cost £55 to put right) The decorator could sue for £750 … … though he was liable to pay back £55 in compensation 17 Example 2 Bolton v. Mahadeva [1972] 2 All ER 1332 Contract to install central heating system for £560 The system as installed produced a small amount of heat, though also fumes It would cost £174 to correct The work was held not to have been substantially completed 18 “Severance” The contract is divided into several distinct parts … … each of which is an entire contract So each substantially completed part earns the price for that part Contracts will be severable if the parties so intend … … or if statute says so 19 “Severance” – party intention An intention to sever can be stated expressly in the contract It can also be inferred from other provisions eg Payment at piece rates (Brown v. Wood (1854) 6 Ir Jur 221) 20 “Severance” – statute eg Sale of Goods Act 1893 s 30 (delivery of wrong quantity of goods) eg Apportionment Act 1870 s 2 (“rents, annuities, dividends, and other periodical payments”) 21 Discharge of contracts 22 Meaning of “discharge” Some events effectively terminate or “discharge” the contract The contract is effective up to the point of discharge, and rights created before discharge remain in force Discharge may itself create rights But once discharged, the contract can create no more rights 23 What sort of events discharge a contract ? 1. Agreement 2. Breach of contract 3. Refusal to perform (“anticipatory breach”) 4. Failure of contingent condition 5. Frustration of contract 24 1. Discharge by Agreement 25 Discharge by agreement An agreement to terminate a contract is usually effective An agreement to vary the terms may also be effective Doubts as to which of the two the parties have agreed on are a matter for construction of the agreement 26 Validity of the agreement to discharge Statute may require writing eg Statute of Frauds (Ireland) Act 1695 There must be an intention to affect legal relations Consideration is required eg Williams v. Roffey [1991] QB 1 27 Waiver But even without consideration, one party may waive their rights So if one party abandons his or her rights … … s/he can only assert them at a later stage on giving reasonable notice eg Charles Rickards v. Oppenheim [1950] 1 KB 616 28 2. Discharge by breach 29 Discharge by breach One party commits a serious breach of contract The other party (“the innocent party”) may then escape the contract This remedy for breach has great practical importance … … as it can be exercised without going to court 30 Effect of discharge for breach? The contract is valid up to the point of discharge, but no further Rights created before the time of discharge remain valid Rights which were to arise after the time of discharge never arise at all 31 Effect of discharge At the instant of discharge ... … the duty to perform the contract (“the primary duty”) … … is replaced by a duty to compensate for the lost performance (a “secondary duty”) 32 Example Hyundai v. Papadopoulos [1980] 1 WLR 1129 Ship-builders must complete the vessel according to a timetable Buyers must pay as each stage in the timetable is reached Suppose buyers fail to make one payment when due … … whereupon ship-builders discharge the contract 33 Example Hyundai v. Papadopoulos [1980] 1 WLR 1129 The contract is valid before discharge So money payable before discharge remains payable, including the missed installment The contract is gone for the future Neither side need perform further, but the ship-builders may sue for their loss of profit 34 Example Hyundai v. Papadopoulos [1980] 1 WLR 1129 So the contract creates rights up to the point of discharge, but not after it The innocent party also gets a right to sue for loss of profit … … which they may or may not exercise, as they wish 35 But how serious must a breach be to justify discharge by the innocent party ? 36 Which breaches justify discharge? The parties will sometimes settle this question in advance … … by agreeing that certain breaches merit cancellation The courts will usually respect such an agreement 37 Intention unclear? Where it is not absolutely clear what the parties meant … … then the court will go for the reasonable solution But in principle the question is one of construction (=interpretation of the contract) … not reasonableness 38 Example Wickman v. Schuler [1974] AC 235 English firm agrees to act as distributor of a German firm's products “It is a condition of this contract” that six particular customers were to be visited every week A majority held that this did not imply a right to cancel if not all the visits were made 39 No intention? If the parties have not specified the effect of breach, then perhaps the Oireachtas has done so Statute therefore says exactly what effect breach has … … unless the parties override this by their own express provision 40 Example Sale of Goods Act 1893 ss 11-15 This classifies sale-of-goods terms as: “conditions”, breach of which allows the innocent party to discharge the contract; or as “warranties”, breach of which gives rise to damages only 41 What if neither the contract nor the Oireachtas has said ? Until relatively recently, the courts followed the classification in the Sale of Goods Act 1893 … … and held that all terms were either “conditions” or “warranties” The court would classify the term by looking at its importance in the contract and to the parties 42 But then ... A re-think occurred in the Hong Kong Fir Shipping case [1962] 2 QB 26, involving the owners’ duty to provide a seaworthy ship to a charterer This duty is in some ways important (eg there should be no holes in the hull) But in some ways it is trivial (eg there should be sticking plaster in the medicine chest) 43 So as well as “conditions” and “warranties” ... … there is a third class of term (“intermediate terms” or “innominate terms” or even “Hong Kong Fir terms”) Breach gives rise to a right of discharge only if the breach deprives the innocent party of the benefit they entered the contract to obtain 44 The test So if a contract term is of this third kind … … then some breaches of it will give rise to a right to terminate, others will not The magnitude of the breach is the main factor in determining its effect 45 Example 1 The Hong Kong Fir case itself Two-year charter of an ocean-going vessel The lack of seaworthiness led to delays of 20 weeks The vessel was still clearly useable outside that period The charterers were held unable to cancel 46 Example 2 The Hansa Nord [1976] QB 44 Sale of citrus pulp, “good condition on shipment” Breach: goods were overheated at the time of shipment But buyers still used the pulp for the intended purpose Again, no sufficiently serious breach 47 Example 3 Aerial Advertising v. Batchelor’s Peas [1938] 2 All ER 788 Batchelor’s paid their goods to be advertised by aerial banner But the pilot mis-timed his flight, and advertised during a Remembrance day 2-minute silence 48 Example 3 Aerial Advertising v. Batchelor’s Peas [1938] 2 All ER 788 Batchelor’s paid for good publicity … … but got very bad publicity instead Therefore they were entitled to treat the contract as discharged 49 Summary If neither the parties nor the Oireachtas have said what the effect of breach is … … then the court must classify the term as a condition, a warranty or a Hong Kong Fir term If it is the last, then the court must also ask whether the effect of the breach justifies termination 50 Classification of terms What factors are relevant in classifying the term? Precedent How important did the parties think the term was ? What are the likely effects of breach ? 51 Terms as to time In commercial cases, the presumption is that the term is a condition ... ... that “time is of the essence” eg Bunge v. Tradax [1981] 1 WLR 711 But any evidence of party intent is relevant 52 Terms as to time But a different attitude is taken in land transactions - the presumption is that time is not of the essence This presumption can be rebutted by evidence of what the parties intended eg Union Eagle v. Golden Achievement [1997] 2 All ER 215 53 Terms as to time Where time is not of the essence but there is a substantial delay … … then either party can make time of the essence by setting the other a reasonable deadline If the deadline is not met, then the contract may be terminated eg Nolan v. Driscoll HC 25/4/78 54 Exercising the right to terminate If a sufficiently serious breach has been committed … … the innocent party has the right to discharge … ... but the contract remains in force unless the right is exercised It may be in the innocent party’s interests to keep the contract alive 55 The right arises only once The Kanchenjunga [1990] 1 Ll 391 A charterer ordered a tanker to an oil terminal (Kharg Island) in a war zone The ship-owner could have discharged the contract But the ship-owner went along with this So the right to discharge the contract was lost 56 Exercising the right to terminate An unequivocal declaration, that the contract is cancelled, is needed It is not enough for the innocent party simply to protest at the breach … … or to say that they are “really upset to receive notice of non-performance” Yukong Line v. Rendsburg Investments [1996] 2 Ll 604 57 Can the right be exercised by silence ? The right must be exercised unequivocally, and silence is rarely unequivocal But sometimes silence can only mean one thing … … and so silence can sometimes amount to an exercise of the right eg The Santa Clara [1996] AC 800 58 The reason given for discharge Does it matter why the innocent party decides to terminate the contract? Most common law jurisdictions say that it does not matter at all … … as the question is whether they had the right to terminate, not whether they were behaving reasonably But Irish law takes a different line 59 The reason given for discharge The Irish rule is that termination of the contract must be justified on the grounds given at the time, if at all … … but if a “fundamental breach” is later discovered, termination can be based on that eg Hearn v. Collins HC 3 /2/98 For criticism see O’Dell [1998] Annual Review of Irish Law 146 60 Does the innocent party have to terminate? The basic rule is that the innocent party has a free choice whether or not to discharge the contract 61 Example White & Carter v. McGregor [1962] AC 413 A company ordered two years’ worth of advertising from an agency Very soon afterwards, they purported to cancel, and never paid a penny But the agency insisted on providing the advertising anyway It was held that the agency were entitled to keep the contract in being, and claim the price 62 Basic rule + exceptions So the basic rule is that the innocent party does not have to terminate But two exceptions are recognised: 1. Where the co-operation of both parties is needed 2. Where the innocent party has no legitimate interest in continuing 63 Exception: Co-operation needed If a contract needs the co-operation of both parties … … then the innocent party cannot proceed if the other party will not eg contract of employment ... … though perhaps in theory the contract can still be kept alive (Gunton v. Richmond LBC [1981] Ch 448) 64 Exception: No legitimate interest Suppose the innocent party insists on performing, but this would force goods or services onto a party who has no use for them The court may rule that there is no legitimate interest in so doing … … and so the innocent party must terminate 65 Exception: No legitimate interest This doctrine is well established ... … but it is not clear how the “legitimate interest” is defined … … or whether there was such an interest in White & Carter v. McGregor itself 66 Example The Alaskan Trader [1984] 1 All ER 129 Charterers of a cargo vessel refused to take command of it according to the contract The owners kept it crewed and available for the whole charter period The Commercial Court said that there was no legitimate commercial interest in doing so 67 3. Discharge by refusal to perform 68 “Anticipatory breach” performance is due on 1st September … … then on 1st April, one side refuses to perform There is not yet a breach of contract But under the doctrine of anticipatory breach the refusal gives a right to terminate Suppose 69 The position is the same as on actual breach The innocent party may either affirm the contract or discharge it Discharge must be unequivocal; otherwise, the contract remains in force The innocent party’s choice may be limited where there is no legitimate interest in keeping the contract in being 70 So the innocent party has a choice They can ignore the refusal … … so that the contract continues as if nothing has happened Or they can accept the refusal ... ... so that the contract is discharged ... ... and the innocent party can sue for damages 71 How serious a refusal to perform is needed? Case 1: Refusal to perform any part of the contract Case 2: Deliberately disabling oneself from performing any part of the contract In both these cases, the innocent party may escape the contract 72 Case 3: Partial refusal to perform Where one side refuses to perform some part or aspect of the contract … … the court will have to decide whether this can fairly be treated as a repudiation of the contract … … or only as a minor breach Various factors are relevant 73 Case 3: Partial refusal to perform Relevant factors:Importance of the unperformed part Whether the refusal to perform was in good faith Whether the refusal was an isolated incident The reasonableness of behaviour on both sides 74 Example 1 Carr v. Limerick VEC [2000] ELR 57 P was employed by D as principal of a school, on a permanent basis The school was then to be merged with another P was ordered to report to the merged school for work She refused 75 Example 1 Carr v. Limerick VEC [2000] ELR 57 The Supreme Court held that she was not in anticipatory breach: She had not been told what her new duties were No attempt had been made to offer her a new principalship, or to negotiate a new job for her 76 Example 2 House of Spring Gardens v. Point Blank [1985] FSR 327 P licensed D to manufacture bullet-proof vests to P’s design D stole P’s design, modified it slightly and manufactured their own vests This was held to be an anticipatory breach of the licence contract It was emphasised that D had used fraud 77 4. Discharge by failure of contingent condition 78 Definition Where the contract states that it is conditional on the happening of a certain event … … then it is discharged as soon as it becomes clear that the event cannot occur The precise effect of a condition is entirely a matter for the contract 79 Different types of conditions A condition may be a “condition precedent” (=the contract does not come into existence until the condition is satisfied) … … or a “condition subsequent” (=the contract exists but is discharged if the condition cannot be satisfied) 80 Different types of conditions A condition precedent may prevent a contract coming into existence at all … … or it may be merely suspensory (=the contract exists, but neither side can sue until the condition is satisfied) 81 Different types of conditions A condition may be for the benefit of both parties (in which case it operates automatically) … … or for the benefit of one party only (in which case that party can dispense with compliance if they wish) 82 Example O'Connor v. Coady [2003] IEHC 77 Agreement for the sale of land Contract was subject to the purchaser’s obtaining planning permission for the land within 4 months At the end of the 4 months, permission had not been obtained But the condition was obviously for the purchaser's benefit, and so he could waive it 83 5. Discharge by frustration of contract 84 The absoluteness of contractual obligations Contracting parties are expected to do exactly what they said they would Contractual duties are not simply duties of “best efforts” (unless they are agreed as such) There is no general defence of unfairness or change-of-circumstance 85 When is a defence available? Where the parties have based their agreement on the existence of a certain state of affairs … … but that state of affairs then disappears … … then the contract has no application to the facts as they are … … and is said to have been “frustrated” 86 Example Taylor v. Caldwell (1863) 122 ER 309 Owners of a music hall agree to hire it Before the start of the letting, the hall burns down The contract assumed the existence of the hall … … and so was discharged by the fire 87 When is a defence available? So we look at the sort of facts the contract presupposes … … and if those facts vanish, then the contract vanishes with them There is no concern with fairness as such Rather, the test is whether the facts have fallen outside those envisaged when the contract was made 88 “If ... a consideration of the terms of the contract, in the light of the circumstances existing when it was made, shows that they never agreed to be bound in a fundamentally different situation which has now unexpectedly emerged, the contract ceases to bind at that point — not because the court in its discretion thinks it just and reasonable to qualify the terms of the contract, but because on its true construction it does not apply in that situation” (British Movietonenews v. London Cinemas [1952] AC 166) 89 Relevance of the parties’ intention So we refer closely to the parties’ intentions … … to determine what assumptions the parties were making … … so that we can refuse to apply the contract where those assumptions no longer hold 90 Need the frustrating event be unforeseen? The question is, what sort of circumstances the contract provides for A failure to provide for certain events may (or may not) be because they were unforeseen Frustration can certainly cover foreseen events, if the contract makes no provision for them 91 Example 1 Bank Line v. Capel [1919] AC 435 Charter of a vessel from April to April The vessel was requisitioned, and not released until September This was considered to make the charter an entirely different type of transaction Therefore the contract was frustrated 92 Example 2 Neville v. Guardian [1995] 1 IRLM 1 D owned a plot of land, and contracted with P for P to build on it D undertook to secure access rights for a road to the land However D failed to secure satisfactory terms for access, and cancelled the project No frustration found 93 Example 3 Davis v. Fareham UDC [1956] AC 696 Contract to build an estate in 8 months Due to labour shortages, it took 22 months … … and involved much more expense than was originally estimated Nonetheless, no frustration was found Labour shortages were within the range of the parties’ contemplation 94 The doctrine is very hard to invoke Most successful pleas of frustration are wartime cases … … and most of those are about disruption to shipping It is very hard to base frustration merely on changed economic conditions, however severe 95 Example 4 The coronation cases These involve entertainments planned for the coronation of Edward VII … … which were cancelled on his illness Some are technically cases of Mistake Some involve contract interpretation A few involve (what we would now call) frustration 96 Krell v. Henry [1903] 2 KB 740 A flat was hired for a few days at a high rent No motive was stated in the contract … … but it was in fact to watch the coronation processions Cancellation of the coronation was held to falsify an assumption underlying the contract, and hence to terminate it 97 Herne Bay Steamboat v. Hutton [1903] 2 KB 683 A boat was hired to tour the fleet at anchor … … at the time set for ceremonies to celebrate the coronation But the contract was not held frustrated on cancellation of the coronation Unlike Krell v. Henry, the arrangement was still a workable one 98 Is Krell v. Henry right? The case has never been directly followed, and it has been criticised as often as it has been approved It is not a case of impossibility Nonetheless it seems defensible … … as the holding of the coronation on the contract date was plainly a common contractual assumption 99 Can all contracts be frustrated? At common law, it was considered that leases could not be frustrated But the English courts have departed from this (National Carriers v. Panalpina [1981] 1 All ER 161) In any event, most Irish cases are covered by Deasy’s Act (Landlord and Tenant Law (Amendment) Act (Ireland) 1860 s 40) 100 Self-induced frustration Frustration cannot be pleaded by someone who is responsible for the frustrating event … … whether deliberately or negligently eg Byrne v. Limerick SS [1946] IR 138 101 Self-induced frustration The rule is applied strictly No-one who could have performed a contract can say that it is frustrated The reasonableness of carrying out the contract is irrelevant … … nor is it a defence that the defendants cannot perform all of their contracts 102 Example The Super Servant II [1990] 1 Ll 1 D hired out two specialised vessels, SS I and SS 2 The SS I sank, a potentially frustrating circumstance However, no contract which could be carried out by SS2 was frustrated … … even though D could not satisfy all of those contracts 103 Frustration by subsequent illegality If the law changes, so that the contractual performance is now illegal, then the contract is frustrated But this is conceptually distinct from other forms of frustration The point is not that the contract is hard to perform … … but that it is illegal to perform 104 Effect of frustration Rights which accrued before the frustrating event remain valid After frustration, the contract cannot create any new rights Money paid before frustration is recoverable if it was paid on a total failure of consideration (Fibrosa v. Fairbairn [1943] AC 32) 105 106
