A2 LAW - BOOK 4
DISCHARGE OF A CONTRACT
TOPICS:
1. DISCHARGE
2. FRUSTRATION
TEACHERS: MISS S. STANDING (HEAD OF LAW) & MR A. HOWELLS
www.loretolaw.blogspot.com
1
Discharging a contract means the parties are released from their obligations. A contract can be
discharged in the following ways:
1. Performance – ________________________________________________________
______________________________________________________________________
2. Agreement – _______________________________________________________
______________________________________________________________________
3. Breach – ________________________________________________________
______________________________________________________________________
4. Frustration – ___________________________________________________________
______________________________________________________________________
2. PERFORMANCE
a) Total Performance
b) Substantial Performance
c) Partial Performance
d) Time
e) Vicarious performance
f) Tender of performance
g) Prevention of performance
2
THE STRICT RULE OF TOTAL PERFORMANCE
§ Performance must be exact to be complete.
Cutter v Powell (1795)
Cutter was 2nd mate on a ship travelling from Jamaica to Liverpool, and had committed himself
to the whole journey when he signed the contract. The journey lasted from 2nd August to 9th
October; however Cutter died on 20th September.
Held: As the Cutter did not complete the voyage (as he died) his widow could
not claim his wages.
Re Moore & Landauer (1921)
Fruit was ordered in cases containing 30 tins; however it was supplied in the wrong
size cases.
Held: This meant the exact requirements of the contract had not been met. The
buyer could reject the whole lot.
AO2
SUBSTANTIAL PERFROMANCE
§ The contract is almost complete but not quite.
§ Money will have to be paid but the court deducts the amount required to complete the work.
§ The amount left to complete should only be a minor amount, and amount to a breach of
warranty. (If it was serious enough to amount to a breach of condition then the injured party
could repudiate).
§ There is a small compromise between the parties.
Boone v Eyre (1779)
A plantation was sold, complete with slaves, but on transfer of ownership it was found that the
slaves had gone.
Substantial performance had taken place, as the main subject of the contract was the
land, which was still there.
3
Hoening v Isaacs (1952)
A flat was to be decorated and furnished for £750, but when the work was over, the customer
paid only £400, arguing that the work was not yet complete.
Held: Although there were defects, the cost of putting these right was far
less than the amount deducted. Therefore, it was substantial performance,
so £695 had to be paid as it would cost £55 to remedy the defects.
AO2
PARTIAL PERFORMANCE
§ The amount of work done is less than that for substantial performance.
§ It is sometimes difficult to differentiate between partial and substantial performance.
§ 2 important points must be noted for partial performance:
1) To discharge the contract, partial performance must be accepted by the other party.
2) Payment is made on a quantum meruit basis – as much as deserved for the work
completed. So if half the work was completed, half the money would be payable.
Christy v Row (1808)
a) The parties discharge the contract by agreeing to pay only for the work done;
b) The party not at fault must have genuinely agreed to end the contract.
Sumpter v Hedges (1898)
A builder who only completed half of the work towards building houses and
stables sued for full payment. The court did not allow this and also rejected
the idea of partial performance. This is because when the builder left, the
home owner had no choice. Partial performance had not been accepted by the
owner, so the contract was simply breached.
4
TIME
§ Traditionally failure to perform on the due date is a breach of warranty that entitles the
injured party to claim damages only, rather than repudiation.
§ But, when time is an important element in a contract, it is seen as being ‘of the essence’.
§ Therefore, where time is of the essence it will be viewed as a term of the contract and the
contractual obligations must be performed within the time expected.
§ The importance of time (i.e. deadlines) must be clear to both sides.
§ There are three situations where time of performance will be considered to be of the essence,
and when a repudiation will be available as a remedy for the breach of the contract:
1) Where the parties have made an express stipulation in the contract that time is
of the essence.
2) Where the surrounding circumstances of the contract show that time of
performance is crucial, e.g.
3) Where 1 party has already failed to perform his obligations under the contract.
In this case the other party is able to stipulate that unless performance is
completed within a set period, repudiation will occur.
VICARIOUS PERFORMANCE
§ Another person carries out the contract, instead of the original party contracted with.
§ This will be allowed in certain circumstances – depending on the nature of the contract.
§ If it is of a general nature, then vicarious performance will be allowed.
E.g.
§ If it is of a personal nature, then vicarious performance will not be allowed.
E.g.
5
Edwards v Newland (1950)
This case concerned the storage of furniture in a warehouse, and it was said that the
personal skill and care of the warehouseman is “of the essence” in such a contract.
Held: That as the personal nature of the warehouseman in the contract was of
the essence, passing the property on to another person to store was
unacceptable. Vicarious performance was not allowed.
TENDER OF PERFORMANCE
§ This occurs where a party has offered to complete all of his obligations under the contract,
but the other party has unreasonably refused to accept performance.
§ In these situations, the party tendering performance is entitled to sue and to recover under
the contract.
§ He may also consider his own obligations as being discharged even though there has been
no performance.
Startup v Macdonald (1843)
The contract was for 10 tonnes of linseed oil to be delivered by the end of March. The
seller delivered at 8.30 on 31st March, which was a Saturday, so the buyer refused to
accept delivery.
Held: The seller was able to claim that he had tendered performance and
recover damages as a result.
PREVENTION OF PERFORMANCE
§ Where a party to a contract prevents the other party from carrying out his obligations
under the contract because of some act or omission then the strict rule cannot apply.
§ In these circumstances, the party trying to perform may have an action for damages.
Planche v Colburn
A publisher was planning to produce a series of books on a particular theme, and hired an
author (the claimant) to write one of the books in the series. When the publisher decided to
abandon the series, the author was prevented from doing the work by no fault of his own, and
he had already done a lot of work for the book.
Held: The author was entitled to recover half the fee for his wasted work on a
quantum meruit basis. (He might also have been able to consider the
abandoning of the whole series of books as an anticipatory breach, and pursued
a claim that way).
6
3. AGREEMENT
§ The contract is abandoned or the terms are changed and both parties agree to this.
§ Both parties can provide consideration for a new contract or vary the old one.
4. BREACH
§ Breaches of a contract can occur where:
A) 1 party fails to perform
B) performance of the contract is defective
C) a lie is found in the contract
D) or, 1 party repudiates the contract, or obligations under it, without any lawful
justification.
§ Remedies available are:
i)
Repudiation = ______________________
ii)
Damages = ________________________
§ Breach of condition – can repudiate or claim damages (providing that this goes to the root of
the contract – Schuler v Wickman Machine Tool Sales)
§ Breach of warranty – only claim damages.
§ Breach of an innominate term – can repudiate or claim damages, as long as the effect of the
breach is sufficiently serious – Hansa Nord
§ Where there is a lie, it depends on when it occurred.
§ A lie before the contract = misrepresentation.
o
§ A lie within a contract = breach.
7
2 TYPES OF BREACHES
1) Actual breach – the breach has already happened.
2) Anticipatory breach – the breach is about to happen. It occurs before the date for
performance of the contract, and is accepted as a breach because one party gives notice to the
other that he will not complete his obligations / or this is implied from his conduct.
Hochster v De La Tour (1853)
The claimant was hired to work as a courier two months after the contract date. One month
later, the defendants wrote to him and cancelled the contract. He threatened legal action, but the
defendants argued that he could not sue unless he could actually show that on the due date he
was ready to perform.
Held: The court would not accept this defence, and decided that there was no requirement
that the victim of a breach of contract should be obliged to wait until the contract was in
fact breached before being able to sue. As the breach was anticipatory, P could recover
damages for the money he would have received had the contract been fulfilled.
Frost v Knight (1872)
D promised to marry his fiancée when his father died. Before his father died, he broke off the
engagement with his fiancée.
The fiancée sued successfully for the breach of promise – even though the father
had not yet died and actual breach of contract had not yet taken place.
AO2
8
§ Originally, prior to the doctrine of frustration being developed, the law was applied very
strictly and rigidly.
§ If a party failed to perform their contractual duties, they were held in breach of contract,
regardless of the reasons for this.
Paradine v Jane (1647)
J owed P rent money. However, J had not paid as he had been forced off the
land by an army for three years.
It was decided that J was still under a contractual duty and could not
discharge the contract even though he could not use the land.
AO2
§ The doctrine of frustration was developed to prevent injustice in cases where one party
would be held responsible for the breach when in fact it was out of their control.
§ It occurs where a contract has been made, but for external reasons beyond the control of the
parties, the contract becomes impossible to perform (frustrated).
§ Both parties are released from their obligations (discharged) rather than one party being held
in breach.
Taylor v Caldwell (1863)
T hired a music hall from C but before it could be used, it burnt down. T sued C for
money sent in preparation based on Paradine v Jane.
The commercial purpose of the contract could not be performed because
of reasons outside the control of both sides. The contract was held to be
frustrated and both sides were released from their obligations, with
neither party being responsible.
9
AO2
§ BUT - frustration has been limited to the following situations:
1. Impossibility – the intervening act makes the contract impossible to perform.
2. Illegality – the intervening act makes the contract illegal to perform.
3. Commercially sterilised – the intervening act makes the contract radically different and
commercially worthless.
1. IMPOSSIBILITY
§ Performance becomes impossible to carry out:
Davis Contractors Ltd v Fareham UDC(1956)
Builders agreed to build houses at a cost of £92,450 within 8 months. As a
result of a shortage of skilled labour, it took 22 months to complete at an
additional cost of over £17,000. The builders claimed the contract was
frustrated to claim the extra amount.
The contract was not frustrated. The doctrine was only applicable if it
was not the fault of either party and the contract was incapable of being
performed.
§ Performance becomes impossible as the subject matter is destroyed:
Taylor v Caldwell (1863)
The music hall being destroyed meant the contract was frustrated.
10
§ Performance becomes impossible as the subject matter is unavailable:
Jackson v Union Marine Insurance Co (1847)
A ship ran aground and could not be loaded in a reasonable time.
The court implied a term into the contract that the ship should be loaded
within a reasonable time. As the ship was unavailable to be loaded within a
reasonable time the contract was frustrated.
§ Performance becomes impossible as the service is unavailable due to illness:
Robinson v Davidson (1871)
D entered a contract for his wife to perform in a piano concert. She became ill and
could not perform so was sued for breach of contract.
She was not at fault here; it was her illness that made it impossible for her to
perform so the contract was frustrated.
§ Performance becomes impossible as the party is unavailable:
Condor v The Baron Knights (1966)
A pop group entered a contract whereby they had to be available to
perform seven nights a week. One of the group became ill and could not
work this often.
The contract was frustrated as one of the party, central to the
contract, was unavailable.
§ Performance becomes impossible for other reasons:
Morgan v Manser (1948)
A music compere was contracted for a ten year period. However, for six years he
was conscripted into the army for WWII, unable to perform the contract.
The contract was frustrated as he was central to the contract but unavailable.
11
§ Performance becomes impossible if the delay is unreasonable:
The Nema (1981)
A contract was made for a ship for nine months with the expectation of 7 trips to be
made in that time. However, because of strikes, only two trips could be made in
that time.
As the delays were unreasonable and the ship could not be used as expected,
the contract became impossible to perform and was therefore frustrated.
§ Performance becomes impossible because of war:
The Evia (1983); The Agathon (1983); The Wenjiang (1983).
In all of these cases, the ships were left stranded because of the First Gulf War. As
the contracts were impossible to perform they were said to be frustrated.
Metropolitan Water Board v Dick Kerr (1918)
Due to war breaking out, a contract for work being completed within six years became
impossible as the government ordered the work to be stopped and took over some of the
land.
AO2
12
2. ILLEGALITY
§ A contract is made but then becomes illegal:
Denny, Mott & Dickson v James B Fraser & Co (1944)
A contract was made for timber with a term that the buyer let the timber yard to
the seller who had the option of buying it. It then became illegal to sell timber.
The contract for the sale of timber was frustrated due to it becoming illegal.
The rest of the contract – the letting of the yard with the option to buy – was
also frustrated.
§ A contract is made but then because of war becomes illegal:
Re Shipton Anderson & Harrison Bros (1915)
Since the government requisitioned a cargo of grain during war time, the
contract was frustrated.
AO2
3. COMMERCIALLY STERILISED
§ The commercial purpose of the contract disappears because of the intervening act.
§ ‘Frustration of the common venture’ / the essence of the bargain has been lost:
Krell v Henry (1903)
A contract was made to hire a room overlooking the procession for the coronation of
King Edward VII (although there was no clear mention of the purpose of the
agreement). As the King was ill, the coronation was delayed and D refused to pay for
the room.
The contract was frustrated as the foundation of the contract was to watch the
procession which was cancelled outside of the control of the parties.
13
§ If some purpose can be found in the contract, then it may not be held to be frustrated:
Herne Bay Steamboat v Hutton (1903)
As part of King Edward VII’s coronation there was to be a review of a fleet of
ships. D therefore hired a boat to see the review of the ships by the King and
also to sail around and view the entire fleet himself. D claimed that as the
coronation was delayed, the contract was frustrated. His claim of
frustration failed as only one purpose of the contract was gone. The
commercial value of the contract had not disappeared completely.
AO2
§ With the leasing of land, if the premises are destroyed, the contract is not frustrated as the
land itself is still available:
Cricklewood Property & Investment Trust v Leighton’s Investment Trust (1945)
A 99 year lease was taken out to build shops but before this was possible,
WWII broke out. As a result of this, the government prevented such
buildings from being put up. A claim was made that the contract had been
frustrated.
As the lease was for much longer than the War, it was decided that the
contract had not been frustrated.
The House of Lords then took the opportunity to review this decision in the following case:
14
National Carriers v Panalpina (1981)
A 10 year lease was taken out on a warehouse. After five years the street where the
warehouse was situated was closed by the council (for 18 months) and the tenant
claimed the contract was frustrated.
The contract was held to be frustrated by this intervening act. It would not
make sense to decide that a lease with a clear purpose which could not be
carried out should continue.
AO2
THE LIMITS OF FRUSTRATION
To apply the doctrine of frustration fairly, the courts have identified a number of situations in
which it is NOT be possible to use it as a way of ending a contract. Frustration will not be
allowed if:
a) It is self induced
b) The contract is simply more difficult to perform rather than impossible
c) It may have been a risk foreseen at the time of the contract
d) There are terms included by the parties to cater for the possibility of frustration
e) The contract ensures absolutely that it must be performed
15
A) FRUSTRATION IS SELF INDUCED
§ If one party causes the event that makes the contract impossible to perform then they will be
responsible:
Maritime National Fish v Ocean Trawlers (1935)
A fishing company with four trawlers hired another. When it applied for five licenses, it was
only granted three, which it gave to its own trawlers. The company then claimed the contract
for the hired trawler was frustrated as there was no licence for it.
The fishing company had brought about this situation themselves. They
were in control of the three licenses and chose not to use one for the
hired trawler. The claim for frustration therefore failed.
AO2
B) IT IS SIMPLY MORE DIFFICULT TO PERFORM
§ An intervening act making the contract more difficult, but not impossible, will not discharge
the parties:
Davis Contractors v Fareham UDC (1956)
Builders could not find labour and material as low as the price tendered to win the
contract. They claimed that the contract was frustrated. The court rejected this
argument on the basis that inconvenience and financial hardship were not
sufficient grounds to make the contract impossible to perform. It was simply
more expensive.
Tsakiroglou v Noblee Thorl (1962)
A contract for a ship to deliver goods became more expensive and longer
due to the closure of the Suez Canal. The contract was not frustrated as
it was not impossible to perform.
16
Thames Valley Power v Total Gas (2005)
Total Gas were unsuccessful in claiming their contract to supply gas was frustrated
due to a rise in gas prices. It was merely a less lucrative contract for Total Gas – as
they would lose approximately £9 million.
AO2
C) A RISK FORESEEN AT THE TIME
§ If the event that frustrates the contract was a risk foreseen at the time of the contract by both
parties, the contract cannot be discharged.
Amalgamated Investment & Property Co v John Walker & Sons (1977)
D made a contract to sell an old building to P for redevelopment, which it was suitable
for at that time. However, unknown to both parties, the building became ‘listed’ and
was therefore not suitable for redevelopment. The value of the building fell by £1.5
million and P tried to claim frustration.
Frustration was unavailable as a means of discharging the contract as the risk
of an old building being ‘listed’ was common. P should have investigated this possibility
and have been more aware, being specialists.
AO2
17
D) TERMS INCLUDED TO CATER FOR FRUSTRATION
§ Terms that deal with what should happen if the contract becomes frustrated, with neither
party at fault, are called force majeure clauses.
§ These terms remove the ability to discharge the contract by way of frustration.
The Fibrosa Case (1943)
A contract was made for the sale of machinery to a Polish company. However, due to
WWII, the delivery became impossible. The contract had a term referring to
delays/inconvenience caused by war.
The contract was still frustrated because the term only dealt with delay caused
by war, not the problem of the impossibility of delivery.
Jackson v Union Marine Ins (1874)
A contract included the term ‘damages and accidents of navigation excepted’.
The ship then ran aground.
The term did not specifically cover this circumstance and therefore the
contract was frustrated.
AO2
E) THE CONTRACT ENSURES ABSOLUTELY IT MUST BE
PERFORMED
§ A frustrating event will not end the contract where it states it should be performed
regardless.
Paradine v Jane (1647)
As the parties did not mention any problems that may prevent the land from
being used, the court decided there was an absolute undertaking that the
contract be performed. Any event that may occur to prevent this was
irrelevant.
18
THE EFFECTS OF FRUSTRATION
When a contract is frustrated, it raises the following problems:
• The contract ends at the point of the frustrating event
• The parties are released from their obligations from that point forward
• The parties are bound by any actions before the frustrating event
Chandler v Webster (1904)
A room was hired for the procession of the King and paid for in advance.
It was accepted that the delay of the procession frustrated the contract but
the parties obligations ended there. The money already paid for the room
could not be recovered.
The Fibrosa Case (1943)
The £1000 paid in advance for machinery could be recovered when the
contract became frustrated. However any work done in making the machines
could not be recovered.
AO2
LAW REFORM (FRUSTRATED CONTRACTS) ACT 1943
§ As a result of the harshness created by frustration, when nothing is recoverable, the Law
Reform (Frustrated Contracts) Act was passed in 1943.
§ It deals with what should happen when a contract becomes frustrated.
§ The 1943 Act provides parties to a frustrated contract with the following rights:
19
S 1(2) Recover money paid in advance of the contract - Even where there is no
consideration, if money is paid in advance it must be returned.
S 1(2) Money due is no longer due
S 1(2) Recover money for work already done under the contract - The court has discretion
over whether to award money for work already carried out. This will only be a fair amount and
not necessarily the actual cost of the work.
Gamerco SA v ICM/Fair Warning Agency (1995)
P, Spanish pop concert promoters, entered into a contract with D whereby the group Guns 'n
Roses would perform at a stadium in Madrid on July 4 1992. On June 30 engineers found
structural defects in the stadium. On July 1 the Spanish authorities banned the use of the
stadium and revoked the permit to hold the event. P had paid D $412,500. Both P and D had
incurred expenses in preparation for the event. P sued under section 1(2) to recover the advance
payment. Held that the contract was frustrated because the stadium was unsafe and its use
banned. P was entitled to recover the advance pay but discretion was used by the courts to
award damages of $412,500 when in actual fact the amount lost was $450,000.
S 1(3) Money must be paid where one party has gained a valuable benefit - The court has
discretion as to whether it awards money to be paid where one party has gained a valuable
benefit because the contract has been partially performed.
BP Exploration v Hunt (1979)
H was granted a concession to explore and drill for oil in Libya. When H found oil he
started drilling but was then stopped by the Libyan Government. The contract
between BP and H was frustrated. BP only recovered a small amount of its costs so
sued H under S 1(3) of the 1943 Act claiming he had gained a valuable benefit from
the oil already drilled and compensation from the Libyan Government.
Since BP had already recovered $62 million of its $87 million outlay, H had to pay the
remaining amount of $35 million as this did not exceed the benefit he had attained.
20
AO2
PROBLEMS WITH THE LAW REFORM (FRUSTRATED
CONTRACT) ACT 1943
The Act does not apply to:
§ The carriage of goods by sea, except charters.
§ Insurance contracts.
§ Perishing goods.
§ Contracts that already have terms to decide what happens where there is a frustrating event.
21