CONTRACT LECTURE 11
C STRICKLAND
DISCHARGE OF CONTRACT
Total time = 48 mins 21 secs
Track/slide 1 0.47
This lecture concerns Discharge of Contract.
Discharge of the contract relates to how the contract comes to an end.
A contract may come to an end by virtue of:
i.
ii.
iii.
iv.
performance
agreement
breach or
operation of law, especially by frustration
In this lecture we concentrate on the all the above methods apart from frustration that is such
a big topic it will be dealt with separately.
Track/slide 2 1.47
First then, a few notes on how Performance brings a contract to an end.
Most contracts come to an end by the very fact that both sides have performed what they
agreed to perform – though performance must be precisely in accordance with the terms of
the contract, both express terms and implied terms. It is only the minority of contracts where
something goes wrong.
Thus, in a sale of goods, the one side pays for the goods, the other side hands over the goods,
and if the goods are of satisfactory quality and so forth, then the contract is performed.
In a contract for the supply of services, one side pays for the service the other carries out the
service and if all is well, the contract is performed.
Failure to comply with the terms implied into contracts under the Sale of Goods Act 1979 and
the Supply of Goods and Services Act 1982 will mean that performance has not been
achieved.
Before looking at how agreement discharges a contract, we should note the difference
between ‘entire’ and ‘severable’ obligations under a contract.
Track/slide 3 2.12
First, we shall look at
Entire obligations
Most CONSUMER CONTRACTS give rise to an ‘entire’ obligation on the business person to
perform his side of the contract, usually, though not always, for a lump sum payment at the
end. Thus, unless the entire contract is performed, the consumer does not have to pay
anything. This is based on the case of Cutter v Powell 1795. A sailor was hired for a voyage
from Jamaica to England. He died before the ship reached England and the widow sued for
payment for his services before he died. She lost. The contract was held to be one of an
‘entire obligation’ – to serve for the whole voyage and so she couldn’t claim for part of the
voyage.
This rule may seem harsh when applied to business people, for instance, when they have done
quite a bit of work for the consumer eg. installing central heating or double glazing or doing
other building work on a house, but not finished. It means they can’t get payment if the job is
seen as one for an ‘entire’ obligation. But, without the rule, consumers would have scant
protection against rogue business people and it encourages the business person to finish the
job once started.
However, there are 2 ways in which the harshness of the rule may be mitigated:
Track/slide 4 3.18
First, where the innocent party [the consumer] has a CHOICE to accept the work done
and does so
Although the business person may be in breach of contract for not fulfilling his entire
obligation under the contract, quite often the consumer will be left with something eg. half
fitted double glazing, a partially built extension or partially fitted central heating. In these
circumstances can the builder/plumber claim payment for the ‘benefit’ thus left with the
consumer?
The answer is that they can claim payment for the benefit left ONLY if the consumer has a
REAL CHOICE as to whether to accept the work done so far or not. If the consumer has no
real choice then the business person cannot claim any payment at all.
Thus, in Sumpter v Hedges 1898 although the builder had half finished his contract to build
2 houses on the other’s land before he abandoned the project, he could not get payment for
the building work. The half built houses were on the other party’s land and could not be
knocked down and returned to the builder in any meaningful way. However, since the
landowner had used building materials left on his land to finish the houses, the builder could
claim the cost of these materials. The landowner did have a choice as regards the materials –
they could have been returned to the builder.
And in Bolton v Mahadeva 1972 there was a contract to install central heating for £560. It
was installed but was defective – it never really got hot and gave off fumes. The plumber
would not put it right. He was not entitled to any payment for the work he had done because
the consumer had ‘no choice’ but to accept the work already done.
Thus, for most consumer contracts concerning home improvements, such as double glazing,
central heating, building works, the consumer has the power to refuse payment following
breach of contract even when a lot of work has been done.
Track/slide 5 2.54
Secondly, the harsh rule of Cutter v Powell 1795 may be avoided where the party in breach
of a contract regarded as an entire obligation contract is only ‘slightly’ in breach
If the party in breach is in fact only guilty of a ‘trivial’ breach of contract, the court may allow
him to recover payment for the ‘substantial’ part of the job done. In Hoenig v Isaacs 1952
there was a contract to decorate and furnish a flat. On completion of the work the decorator
was owed £350 but the defendant refused to pay it saying that the contract was for an ‘entire
obligation’ and some of the work was defective ie. breach of contract as regards completing
the work with reasonable skill and care. However, since the defects were only TRIVIAL and
would only cost £55 to put right, and the total cost of the contract was £750, the decorator
could get the additional payment minus the £55 ie. £295.
Note, that this only applies to TRIVIAL defects from the contract obligation – so in the
Bolton v Mahadeva case, the breach was TOO SERIOUS to let the plumber get any money.
Beatson notes, in ‘Anson’s Law of Contract’, 27th edition, page 547, that:
‘Entire obligations are, however, the exception rather than the rule. The obligations in most
bilateral contracts are “divisible” in the sense that the breach of any one or more of them will
not necessarily constitute a ground for discharge... A failure by one party precisely to perform
its obligations under the contract will give a right of action in ‘damages’ to the other; but it
will not necessarily “discharge” the innocent party from the performance of its own
obligations under the contract.’
Track/slide 6 0.40
Severable obligations
This mainly applies to ‘commercial’ contracts where payments are made in instalments in
relation to various stages of performance. Usually breach of performance on one stage just
relates to that stage and does not result in breach of the whole contract. See Regent OHG
Aisestadt v Francesco of Jermyn Street Ltd 1981.
Track/slide 7 1.46
We can now make a few comments on discharge of contract by Agreement.
The parties to a contract may end the contract by agreeing to do so. To ensure that this
agreement is legally binding the parties must make it enforceable by showing consideration
for it. If both still have obligations under the original contract, the consideration is that they
both suffer detriment by these obligations not being performed. If one side has completed his
side of the bargain but the other has not, then either some extra consideration must be
provided for the agreement to end the contract or it will have to be effected by ‘deed’ where
no consideration is required. Although the parties could just agree to end the original contract
with no further agreement, this could be risky if one party then alleges that the other has not
performed the original contract. Thus, it is prudent to end a contract by agreement by the
creation of a second legally binding agreement to this effect.
Track/slide 8 3.01
We can now move on and consider how a contract is discharged by a Breach of contract
A breach of contract is where one side either:
-
fails to perform his obligation under a contract as discussed above, unless of course
that side has a lawful excuse such as frustration; or where one side
refuses to perform his obligations under the contract or where one side
performs his contractual obligations defectively eg. without taking
reasonable care and skill or providing goods of an unsatisfactory
quality or not performing in the time frame for the contract
The effect of the breach of contract depends on whether the term breached is a condition,
warranty or innominate term.
It must be noted that there are no ‘general’ principles regarding how to establish a breach of
contract. It is up to the party alleging the breach of contract to show that it has in fact been
breached. This will obviously depend on a close analysis of the actual terms in the contract,
both express and implied.
It is also worth noting that usually the degree of fault of the person in breach of contract is
irrelevant, that is, once a contract is breached according to the terms of the contract, it is
breached. In this sense liability is often said to be ‘strict’. However, if the terms of the
contract that are alleged to be breached relate to the performance of services, then liability is
not strict in that sense. Here, it is often necessary to show that the party who is alleged to be
in breach has not performed the service ‘with reasonable care and skill’. This may be an
implied term, for instance, under section 13 of the Supply of Goods and Services Act 1982.
Track/slide 9 2.02
Where a condition is breached ( because the term goes to the root of the contract) the breach
is said to be REPUDIATORY. This entitles the innocent party to either:
Terminate the contract or
Affirm it.
If the innocent party decides to terminate the contract this applies only to future
obligations remaining under the contract. He can claim damages for the breach but the
contract is not regarded as terminated from the moment it was made. The amount of damages
has to be decided in the light of the terms in the contract which means that the court has to
take account of any exclusion clauses in the contract. It may be that an exclusion clause
exempts the party in breach from liability for the breach.
The innocent party may however decide to affirm the contract which means that both
sides will have to continue to perform the contract. The innocent party can still claim
damages for the breach as this is the ‘secondary obligation’ that comes into play following
breach.
Thus, only where there has been a breach of condition plus a decision to terminate the
contract by the innocent party does breach of a condition actually ‘discharge’ the contract.
Track/slide 10 4.12
Where a warranty is breached (because the term is not as essential to the contract) the
breach is not repudiatory and so the innocent party can only claim damages. Thus, when the
term breached is only a warranty, the contract is not actually ‘discharged’ – the contract
remains in force.
Where an innominate terms is breached if the effect of the breach is serious then the
breach is said to be repudiatory and the innocent party can elect to terminate or affirm the
contract and claim damages. If the effect of the breach is less serious, it is not repudiatory,
and the innocent party can only claim damages
It can be seen that the effect of a term being classified as a condition gives the innocent party
greater rights than if the term was classified as a warranty.
A term in a contract may be classified as a ‘condition’ either by:
-
an Act of Parliament eg. Sale of Goods Act and Supply of Goods and
Services Act
by the courts
by the parties themselves
If the parties use the word, ‘condition’ in the contract, the court is likely to say the term was a
condition, but this is not conclusive.
A case to show this is L Schuler AG v Wickman Machine Tool Sales Ltd 1974. This case
concerned an agreement between Schuler and Wickman. Schuler gave Wickman the sole
right to sell Schuler products in a certain territory that included the UK. Schuler wanted to
‘terminate’ the contract because Wickman did not carry out the term in the contract, under
clause 7 (b) that they were to visit the named 6 firms at least once a week to promote sales for
the duration of the contract that was stated to be from 1963 to 1967. Schuler contended that 7
(b) was a ‘condition’ of the contract that allowed them to repudiate the contract because 7 (b)
actually had the words in it, ‘It shall be a condition of this Agreement that …’ Remarkably
this case progressed from arbitration through the High Court and Court of Appeal to the
House of Lords on this very point. The House of Lords upheld the decision of the Court of
Appeal that despite the words ‘it shall be a condition….’ Clause 7 (b) was not a condition of
the contract in the sense that allowed repudiation. The reasons were that the contract as a
whole was so badly drafted and that there was a lot of confusion over the interplay between
clause 7 and 11.
However, in a well drafted contract, the use of the word ‘condition’ can give rise to the right
to repudiate for breach.
Track/slide 11 2.09
If the parties do not specify the status of the term, the courts may decide that it is an
innominate term to give themselves more flexibility and so as not to be too harsh to the party
in breach. They try to work out what must have been the ‘intention’ of the parties when the
contract was made. In some areas of trading, it has become established what type of term
certain terms are despite lack of explicit statement to this effect in the contract. The classic
example is for terms as to ‘time’.
For ‘commercial’ contracts, it is generally accepted that stipulations as to time of performance
are regarded as very important, as conditions, and breach of a time stipulation is regarded as a
repudiatory breach. Although in Torvald Klaveness A/S v Arni Maritime Corporation,
The Gregos 1994, the majority of the House of Lords held a time term in a commercial
contract to be an innominate term. This may not be desirable since in commercial dealings
businessmen and women like ‘certainty’ in their dealings and regarding a time term as
innominate breeds uncertainty.
In ‘non-commercial’ contracts a time term is not normally regarded as a condition unless it is
expressly stated to be such by the parties. See United Scientific Holdings Ltd v Burnley
Borough Council 1978.
Track/slide 12 2.26
So far we have looked at how a breach of contract may occur by:
i.
ii.
non performance, or
defective performance, including ‘late’ performance
Now we need to briefly look at the situation where one party states ‘in advance’ that they are
‘not’ going to perform the contract – ie. anticipatory breach.
The leading case is Hochster v De La Tour 1853.
The defendants had made a contract to employ the plaintiff as a courier from 1st June 1852
onwards. However, in May they told the plaintiff they no longer needed him and so the
plaintiff sued them for breach of contract. He succeeded without having to wait until the
actual start date for the contract. He was entitled to an immediate remedy because of an
implied term in the contract that between the date the contract was made and the start date of
the contract, neither side would do anything to prejudice the contract that had been made.
An anticipatory breach is usually made EXPRESSLY by the side not wanting to go ahead
with the contract, by words. However, it can also be effected by unequivocal conduct.
When there has been an anticipatory breach of contract, damages will be payable from the
date of breach without having to wait for the start date of the contract. This is because the
contract is subsisting as soon as it is made – actual commencement of performance under the
contract is for the future, but the contract has been made and so where one side declares their
clear intention not to perform in the future, this is a breach of the contract.
Track/slide 13 5.27
An interesting case to consider in relation to breach of contract and its effects, is Photo
Production Ltd v Securicor Transport Ltd 1980. We previously mentioned this case when
looking at exclusion clauses and fundamental breach and noted that an exclusion clause may
relate to fundamental breach leaving it up to the court to decide, on a matter of construction,
whether or not the breach is covered by the exclusion clause. These points will be discussed
in further detail here as well.
First, let us look at the facts in this case.
Photo Productions Ltd owned a factory and entered into a contract with Securicor Transport
Ltd, a security firm, for the latter to provide security services for the factory. The factory was
destroyed by a fire and the loss totalled £615,000. The question was whether or not Securicor
was liable to Photo Productions for this loss.
In the contract Securicor agreed to 'provide their Night Patrol Service whereby four visits per
night shall be made seven nights per week and two visits shall be made during the afternoon
of Saturday and four visits shall be made during the day of Sunday'. The contract also
incorporated printed standard conditions which contained both exclusion clauses and
limitation clauses.The questions to be considered by the trial judge, Court of Appeal and
ultimately the House of Lords were:
(i) whether these conditions could be invoked at all in the events which happened
and
(ii) if so, whether either the exclusion clauses or limitation clauses could be applied on the
‘facts’.
The trial judge found in favour of Securicor.
The Court of Appeal found in favour of Photo Productions.
And, the House of Lords found in favour of Securicor, thus reversing the decision of the
Court of Appeal.
The question as to whether Securicor was responsible for the fire arose because on the Sunday
night when the fire occurred, the duty employee of Securicor, Musgrove, deliberately started
a fire by throwing a match onto some cartons. The fire got out of control and a large part of
the premises was burnt down. Though what he did was deliberate, it was not established that
he intended to destroy the factory. The reasons for him starting the fire were unclear and the
trial judge said:
'Whether Musgrove intended to light only a small fire (which was the very least he meant to
do) or whether he intended to cause much more serious damage, and, in either case, what was
the reason for his act, are mysteries I am unable to solve.'
Securicor relied on the following term in the contract:
'Under no circumstances shall the Company [securicor] be responsible for any injurious act or
default by any employee of the Company unless such act or default could have been foreseen
and avoided by the exercise of due diligence on the part of the Company as his employer;
nor, in any event, shall the Company be held responsible for;
(a) Any loss suffered by the customer through burglary, theft, fire or any other cause, except
insofar as such loss is solely attributable to the negligence of the Company's employees acting
within the course of their employment...'
Securicor also had inserted a term ‘limiting’ their liability to stated amounts in case the
exemption clause was not effective in totally exempting their liability.
Track/slide 14 2.11
The House of Lords allowed the appeal by Securicor for the following 4 main reasons:
(i) There was no rule of law by which an exception clause in a contract could be eliminated
from a consideration of the parties' position when there was a breach of contract (whether
fundamental or not) or by which an exception clause could be deprived of effect regardless of
the terms of the contract,
because
the parties were free to agree to whatever exclusion or modification of their obligations they
chose and therefore the question whether an exception clause applied when there was a
fundamental breach, breach of a fundamental term or any other breach, turned on the
construction of the whole of the contract, including any exception clauses
and
because (per Lord Diplock) the parties were free to reject or modify by express words both
their primary obligations to do that which they had promised and also any secondary
obligations to pay damages arising on breach of a primary obligation.
In other words, even if the breach is seen as a fundamental breach, it may still exempt one
side from liability under the contract if such fundamental breach is covered by the exemption
clause and this is a matter of construction. The reasons for this seem to relate to the concept
of ‘laissez faire’, freedom of contract between parties on an equal business footing.
Track/slide 15 0.50
The second finding of the House of Lords was:
That, although the defendants were in breach of their implied obligation to operate their
service with due and proper regard to the safety and security of the plaintiffs' premises, the
exception clause was clear and unambiguous and protected the defendants from liability.
So, the House of Lords took a literal approach to interpreting the exclusion clause and did not
resort to strained linguistic techniques to protect either side – the language was clear and
unambiguous and so they were not prepared to interfere with it.
Track/slide 16 0.46
The third point held was that in commercial matters generally, when the parties are not of
unequal bargaining power and when the risks are normally borne by insurance, the parties
should be left free to apportion the risks as they think fit.
Again, this relates to freedom of contract and the commercial realities of life that businesses
are usually insured and allocate risks under contract themselves.
Track/slide 17 1.11
Fourthly, that on true construction of the exclusion clause the words related to ‘negligent acts’
and so the defendants were able to rely on it on the facts. The Securicor employee had not
acted negligently but deliberately. Had he acted negligently then Securicor’s exemption
clause would have made them liable because, by express words, they had agreed that the
exemption clause would ‘not’ protect them against negligent acts of their employees.
Because the words in the exemption clause made no reference to deliberate acts, the
exemption clause protected Securicor from liability for the fire.
Track/slide 18 4.18
We can look at some remarks from the judgment of Lord Wilberforce in the House of Lords.
Firstly, his Lordship rejected the approach of the Court of Appeal that an exemption clause
could not apply to a fundamental breach of contract.
Secondly, his Lordship stated:
‘.. the nature of the contract has to be understood. Securicor undertook to provide a service of
periodical visits for a very modest charge which works out at 26 pence per visit. It did not
agree to provide equipment. It would have no knowledge of the value of the plaintiff’s
factory; that, and the efficacy of their fire precautions, would be known to the respondents. In
these circumstances nobody could consider it unreasonable, that as between these two equal
parties the risk assumed by Securicor should be a modest one, and that the respondents should
carry the substantial risk of damage or destruction.’
Thirdly, his Lordship looked at the words in the exclusion clause itself. He noted that
Securicor were in breach of contract for failing to comply with an implied term of the contract
to ‘operate the service with due and proper regard to the safety and security of the premises’.
His Lordship then asked the question, that, this being the breach of contract, did the exclusion
clause protect Securicor from liability?
He stated:
‘These words [in the exclusion clause] have to be approached with the aid of the cardinal
rules of construction that they must be read contra proferentum and that in order to escape
from the consequences of one’s own wrongdoing, or that of one’s servant, clear words are
necessary. I think these words are clear.’
He went on to note that Securicor had clearly exempted themselves from loss to the customer
suffered by burglary, theft, fire or any other cause but had restricted this so that they would be
liable if any of the said loss was solely attributable to the negligence of one of their
employees.
Photo Productions sought to read into this that Securicor was also liable if the loss was
attributable to the ‘deliberate act’ of one of it’s employees. Lord Wilberforce would not
accept this argument. He said that Securicor had used clear language and he was not prepared
to interfere with it. As such, Securicor was not liable for the fire as it had been caused not by
the ‘negligence’ of its employee but by the ‘deliberate act’ of its employee and thus the
exemption clause applied.
Track/slide 19 3.22
With regards to breach of contract we can look at the judgment of Lord Diplock.
His Lordship talks about ‘primary’ obligations and ‘secondary’ obligations under a contract.
He stated:
‘Breaches of primary obligations give rise to substituted or secondary obligations on the part
of the party in default, and, in some cases, may entitle the other party to be relieved from
further performance of his own primary obligations.’
The obligations each party has under a contract are thus referred to as ‘primary obligations’.
If these primary obligations are breached, then such a breach gives rise to the ‘secondary
obligation’ to pay damages.
Where the term of the contract that has been breached is a ‘warranty’, the primary obligations
of the parties remain unchanged in so far as they have not been performed yet. In addition,
the innocent party may claim damages for the breach as this right has arisen as a secondary
obligation on the part of the person in breach.
Where the term of the contract that has been breached is a ‘condition’, and the innocent party
has chosen to terminate the contract, the remaining primary obligations under the contract
come to an end. In this case, the innocent party is entitled to damages from the party in
breach ‘in substitution’ for the remaining performance that was due under the contract. This
is the secondary obligation put on the party in breach. Thus, when the term breached is a
condition, and the innocent party elects to terminate the contract, we can see that the
performance obligations for the ‘future’ are ‘discharged’, and in recompense, the innocent
party can also claim damages for the non-performance of these future obligations. In this way
it can be seen that breach of contract operates ‘prospectively’ not ‘retrospectively’.
Track/slide 20 1.02
Finally, a contract may be discharged by ‘operation of law’.
We shall not look at this in much detail but note that the contract may be discharged as a
result of a ‘merger’, by a ‘judgment of the court’, by ‘alteration or cancellation of a written
instrument’, by ‘bankruptcy’ or by ‘frustration’.
For more details on these see ‘Anson’s Law of Contract’, by Beatson, 27th edition, pages 552
to 555.
How a contract is discharged by operation of the doctrine of frustration is discussed in a
separate lecture.