Contract Law - Discharge

what does it mean for a contract to be discharged?

- every contractual obligation gives rise to a corresponding contractual right

- where the obligation of 1 party is discharged, the corresponding right of the other party is extinguished

- where all obligations arising under a contract are discharged and all rights are thus extinguished, the contract is discharged

what are the different ways a contract can be discharged?

(a) performance;

(b) expiry;

(c) agreement;

(d) breach; or

(e) frustration

what is discharge by expiry?

- a contract will expire when it is completed according to its own terms

- this if often done by a date stipulated in the contract or by an occurrence of an event

what is discharge by performance? (the entire obligations rule)

- a contractual obligation is discharged by complete performance of the obligation

- promisee is entitled to the benefit of complete performance exactly according to the promisor's 'undertaking'

- a promisor who only performs part of their obligation is not discharged from that obligation

cutter v powel in regard to the entire obligation rule?

cant receive part of payment if contract has not been completed in full

what are the exceptions to the entire obligations rule?

(a) acceptance of partial performance;

(b) substantial performance;

(c) divisible obligations; and

(d) wrongful prevention of performance

what is acceptance of partial performance?

- where one party has only given partial performance of the contractual obligations; it is possible that the innocent party, rather than reject the work, accept partial performance

- it is at the discretion of the innocent party

- if innocent party accepts voluntarily then the party in default will be entitled to payment on a quantum meruit basis (meaning as much as deserved) ; remedy

- acceptance has to be voluntary

- court will asses the value on an objective basis

what is substantial performance?

- where contract = substantially performed, it may be possible for the party who rendered such performance to obtain the contract price subject to a deduction to reflect the cost of remedying the 'defect'

- the court considers nature + extent of defect which is done by measuring the cost of remedying the defect against the contract price

what happens if the defect is too serious/ if not in substantial performance?

- the party who rendered the defective performance will not be able to entitled to recover any money if too serious

- h/e if substantial performance is found to have been rendered, then the party will be entitled to the contract price subject to a deduction

what is defined as 'substantial performance'?

question is whether the defect goes to the 'root of contract'

what are divisible obligations?

- some contracts are clearly meant to be divided into parts

- e..g, pay of salary under fixed contract; if so, party is entitled to payment for each part which is performed

- q of divisibility depends on the intention of the parties

what is wrongful prevention of performance?

where 1 party performs part of the agreed obligation, and is then prevented from completing the rest by some fault of the other party, they will be entitled to payment despite not having completed the full obligation

what are the 2 options for the innocent party in wrongful prevention of performance?

(a) to sue for damages for breach of contract; or

(b) to claim a quantum meruit

what is the defence for allegation of failure to perform?

tender of performance

what is tender of performance?

- good defence for D to show they 'tendered performance'

- for this to be successful, the promiser must show that they unconditionally offered to perform their obligations in accordance w// the terms of the contract but the promisee refused to accept such performance

- in relation to payment of debt: a plea of tender does not discharge the debt h/e it would prevent the creditor from claiming interest or damages on that debt subsequent to tender performance

what are the 2 ways a contract can be discharged by agreement?

(a) by a subsequent binding contract between the parties; or

(b) alternatively, by operation of a term of the original contract

what is discharge by subsequent binding contract?

- in essence = formation of a new contract

- may occur in several ways:

- both parties have obligations which remain underperformed; could be discharged by mutual waiver

- this is a new contract by which the parties agree to waive their rights under the old contract in consideration for being released from their obligations

- common for commercial situations where parties wish to end existing contract for commercial certainty

- often agree terms to ensure no future liabilities

what 2 elements are needed for discharge or subsequent binding contract?

- sometimes called accord and satisfaction

- there must be agreement that the obligation will be released ('accord') and there must be consideration from the promisee to release a party from obligation ('satisfaction')

what is a potential issue w// accord and satisfaction?

where 1 party has performed its obligations in their entirety but something remains done by the other party

how can the issue of accord and satisfaction be resolved?

- the party to whom the obligation is owed may release the other party by a subsequent agreement under deed

- this avoids the need for consideration all together , b/c a gratuitous promise (one w//o any consideration) is enforceable of made in a contract in the form of a deed

- or the party to whom the obligation is owed may provide consideration by agreeing w// the other party to accept something different in place of the former obligation

- then, the former obligation is discharged, there is new consideration, there can be no satisfaction

what is discharge by the operation of a term of contract?

- contract should contain a term providing the discharge of obligations arising from the contract

- may be a condition precedent or condition subsequent

what is a condition precedent?

- condition which must be satisfied before any rights come into existence

- where the coming into existence of a contract is subject to the occurrence of a specific event

- contract is suspended until the condition is satisfied

- where condition precedent is not fulfilled, there is no true discharge b/c the rights + obligations under the contract were contingent upon an event which did not occur ie the rights + obligations never came into existence in 1st place

what is condition subsequent?

a term providing for the termination of the contract and the discharge of obligations outstanding under the contract, in the event of a specified occurrence e.g., termination clause specifying the contract will come to an end upon the occurrence of specified events

what is repudiatory breach of contract at common law?

- where 1 party has breached a term of the contract which is either a condition or innominate term which is to be treated as a condition

- termination of repudiatory breach is 1 way in which a contract may come to an end

what is the parties choice when there has been a repudiatory breach?

- has a choice as to whether to terminate or affirm the contract

- the choice is not entirely unrestricted

what is anticipatory breach?

- where a party indicates they will not perform their contractual obligations in advance of the date of performance

- a party who, by words or conduct, leads a reasonable person to conclude that they do not intend to perform their part of the contract is said to gave 'renounced' the contract

- the innocent party has an immediate right to 'accept' the renunciation and to treat the contract as terminated

what is the effect of terminating a contract for repudiatory breach?

- put an end to all primary obligations of both parties remaining unperformed

- the innocent party can claim damages not only arising from specific breach but also the loss of the contract caused by termination of the contract as a whole

- the discharge from remaining rights and obligations which have accrued prior to termination remain enforceable

what is the risk of wrongful termination for repudiatory breach?

- involves a high degree of risk for the client, in particular, w// regard to the risks of wrongful termination

- to combat this issue: Hong Kong Fir test which leads commercial parties to inject certainty into their contracts by explicitly agreeing a list of breaches that will give rise to a right to terminate

what is the right of election?

- where there has been a repudiatory breach, the contract is terminated only if the aggrieved party makes the election (meaning choice) to treat the breach as repudiating the contract

- the innocent party must make their decision to terminate the contract known to the party in default

- innocent party is allowed a period of time in order to decide between these 2 alternatives

what are the benefits of affirmation?

- if innocent party elects to affirm the contract, the contract survives and the rights of the innocent party are preserved

- alternatively, innocent party may calculate that performance of changed contract may result in debt, it may decide to terminate contract

- where a party has renounced its obligations, the innocent party can still affirm the contract, perform its own obligations and claim the sum due under the contract in debt action

does the innocent party affirming the contract mean they will retain a claim to damages arising from the breach?

- yes

- but they cannot terminate as a result of it (so damages would not include compensation for loss of performance of the contract)

- the election is between accepting the contract as discharged or continuing but election is not a waiver from damages

how is a contract affirmed?

there must be evidence of a clear and unequivocal commitment to continuing w// the contract

what are the 2 important limitations on affirmation of contract?

1) the co-operation of the breaching party is required for continued performance of the contract (should be uncontroversial)

2) the innocent party has no 'legitimate interest, financial or otherwise' in affirming the contract and continuing w// performance [will only operate if the D can show damages would be adequate remedy for C and election to keep contract alive would be unreasonable]

what is frustration?

about events that are beyond the control of either party, occur after the formation of the contract and which render performance radically different from that which was agreed to it at the time the contract was formed

when can performance be radically different?

- performance is impossible

- performance is illegal

- common purpose is frustrated

(not an exhaustive list and frustrating may fit into more than 1 category)

what is the effect of frustration?

- broadly, to relieve a party from further obligations under the contract, so they do not meet these radically different obligations

- if a contract is frustrated, it is brought to an end automatically: the parties have no choice in the matter

- can also be raised as a defence for a breach of contract

what is meant by performance is impossible (impossibility and unavailability)?

- frustration may be invoked in circumstances where the contract becomes impossible to perform due to the total or partial destruction of some object necessary to the performance of the contract

- might be extended to situations of death or illness of 1 of the parties in a personal contract, especially where a specified individual is engaged to render a particular service

- unavailability in shipping contracts if the interruption is such as to make performance substantially diff from what was originally undertaken

what is meant by performance is illegal (supervening illegality)?

frustration may also occur where a change in the law or state intervention renders the performance illegal

what is meant by common purpose is frustrated?

- a contract can no longer be carried out b/c of some supervening event, frustrating the contract despite that it is still physically possible to carry out the contract

- there must be a joint purpose of both parties, not just 1

- e.g., Krell v Henry: hired room to watch kings procession, he fell ill, contract was frustrated by supervening event as it was understood this was the purpose of hiring the rooms (narrow, distinguished decision)

- needs to be the common foundation of contract

what are the limitations on the doctrine of frustration?

must be applied in v. narrow limits

what is frustration now?

- merely an increase in expense/ onerousness

- caused by the default of a party

- which the parties could reasonably have contemplated

- provided for in the contract

what is meant by contracts that become more difficult or expensive to perform?

- it is v. rare for a contract to be held to have been frustrated by an event which leaves it possible to perform but which simply makes it much more onerous to 1 party

- consequently, it is accepted that it is unlikely that a contract will be frustrated merely b/c an event has occurred which renders that contracted for by 1 worth less than he anticipated, or where an unexpected event merely makes the contract more expensive to perform

what is self-induced frustration and will it apply?

- frustration will not apply where it was induced by 1 of the parties ie b/c the event was their fault or choice

- it is for the party alleging a self-induced frustration to prove that it is

- if they succeed in showing the frustrating event is self-induced then the defence of frustration fails and the D will be in breach of contract

does the doctrine of frustration allow unforeseen risks?

- yes

- if you could have foreseen an event, but failed to make provision for it in your contract, the doctrine of frustration will be less likely to apply

- the key test is whether the event would have informed the manner in which the parties assessed the risk of entering into the contract; highly theoretical risks which the parties would not have taken into account would not be relevant

can the doctrine of frustration override express and unambiguous contractual provisions?

- commercial contracts often include force majeure clauses which states what will happen between the parties should a particular set of circumstances materialise

- force majeure clauses enables the parties to allocate risks in relation to these events at the outset and may allow for the continuance of the contractual relationship in circumstances that would otherwise amount to frustration

- so if this clause is present, unlikely a party would be able to rely on frustration

what is the consequence of frustration?

if a frustrating event occurs all future obligations are automatically discharged by the common law

what does the Law Reform Act say about obligations arising prior to the frustrating event?

- money paid before the frustrating event can be recovered

- money that should have been paid before the frustrating event no longer needs to be paid

- expenses incurred by the payee (usually the supplier) can be recovered out of the total sum paid/ payable before the event. The recovery of expenses is at the discretion of the court

what is the power of the court in terms of expenses incurred by the payee?

- broad discretion

- expenses incurred by the payee must be directly related to an attempt to perform the contract

- amount retained or recovered cannot exceed the actual expenses incurred and the amount paid or payable prior to the frustrating event

- it is for the payee to establish that the expenses were incurred and that it is for the court to deduct them from the sums paid or payable to them before the frustrating event

- if nothing was paid or payable prior to the frustrating event, the party will not be able to get any expenses

- supplier must recover actual sum not what is considered a just sum

what happens when the benefit conferred before the frustrating event occurs is non-monetary?

- a party who has gained valuable benefit under the contract before the frustrating event may be required to pay a just sum for it

- task for the court is to identify and value the benefit conferred, and then, make an assessment of the just sum to be awarded

- amount awarded cannot exceed the value of the benefit obtained

- provided the court does not award more than this amount, the court may award whatever sum is just having regard to the circumstances of the case