Discharge by performance, agreement or breach

Reminder on classification of terms.

To discharge by breach, the type of term breached determines what remedies are available.

Condition: Important term going to the root of the contract. Breach entitles the innocent party to terminate or affirm, plus claim damages → Poussard v Spiers 1875.

Warranty: Less important term. Breach gives damages only — cannot terminate the contract → Bettini v Gye 1875.

Innominate term: Depends on the seriousness of consequences. If the breach deprives the innocent party of substantially the whole benefit → terminate + damages. If not → damages only → Hongkong Fir v Kawasaki (The Hong Kong Fir) 1962.

Hong Kong approach: Does the breach deprive the innocent party of substantially the whole benefit of the contract?

If yes, innocent party can terminate/affirm plus claim damages.

If no, innocent party can claim damages only.

Modern approach: Grand China Logistics v Spar Shipping 2016: a term is innominate unless a contrary intention is made clear.

How are terms classified → summary

By statute

E.g. Sale of Goods Act 1979, s.14(6) expressly states s.14(2) (satisfactory quality) is a condition. But note s.15A — if a breach is so slight it is unreasonable to reject goods, the breach may be treated as a breach of warranty instead. SGA 1979 s.14(2) SGA 1979 s.15A

By the parties

Courts generally give effect to express intention. "Of the essence" language is strong evidence of a condition. Lombard North Central v Butterworths Schuler v Wickman Tools — using the word "condition" is not conclusive; more perverse results = less likely to be intended as a condition

By the courts

Term goes to the root of the contract → condition (Poussard v Spiers — missing performances = condition; Bettini v Gye — missing rehearsals = warranty)

Binding authority confirms the term is a condition (The Mihalis Angelos — "expected readiness to load")

Certainty vs fairness tension: Arcos v Ronaasen (strict but unfair) → led to innominate terms

What does termination because of a breach do to a contract?

Termination for breach ends all future primary obligations and substitutes secondary obligations (e.g. damages). It is distinct from rescission (which treats the contract as never having existed).

What is a right of election in breach?

What is a repudiatory breach? A repudiatory breach is a serious violation of a contract that goes to its root, depriving the innocent party of substantially the whole benefit of the agreement. It entitles the innocent party to immediately terminate the contract and claim damages.

Right of election → on repudiatory breach

Innocent party may terminate + claim damages OR affirm + claim damages. A reasonable period to decide is allowed — but don't wait so long the court infers affirmation (Stocznia Gdanska v Latvian Shipping 2001). You must communicate the decision to terminate either by words or clear conduct (Vitol v Norelf, The Santa Clara). Election is final because once affirmed, cannot later terminate for the same breach (The Kanchenjunga).

What is an anticipatory breach?

Where a party indicates before the date for performance that they will not perform. The innocent party may terminate and claim damages immediately, without waiting for the date of performance → Hochster v De La Tour 1853.

Can the innocent party affirm an anticipatory breach?

Innocent party has the right to affirm and sue for the contract price → White and Carter v McGregor 1962

Two restrictions apply:

Must not need the contract breaker's cooperation (active or passive) → Hounslow v Twickenham 1971

The London Borough of Hounslow, entered into a contract with the defendant builders for the construction of dwellings. The defendants were given possession of the construction site for four years. The plaintiff’s architect was not satisfied with how work was progressing so the council gave notice to the defendants terminating their employment. The builders declared that the council’s actions were invalid under the contract and carried on with the work in accordance with the contract.

Must have a legitimate interest in performance — damages being adequate and affirmation being unreasonable only in extreme cases → The Dynamic 2003

What are the risks of affirmation?

What are the risks of affirmation?

Subsequent frustration defeats the claim for contract price → Avery v Bowden 1855

Innocent party's own subsequent breach can defeat the claim → The Simona 1988

What are the two standards of performance?

The standard of performance refers to the threshold a party must meet when performing their contractual obligations — essentially, how well do you have to do the thing you promised?

Strict liability: You are automatically liable if your performance falls short, regardless of how careful you were or whether the failure was your fault. The classic example is the implied term of satisfactory quality under s.14(2) of the Sale of Goods Act 1979. If the goods aren't satisfactory, you've breached the contract — full stop. You can't argue "I tried my best" or "it wasn't my fault."

Reasonable care and skill: This is a fault-based standard, most commonly applied to services. Under s.13 of the Supply of Goods and Services Act 1982 (or s.49 of the Consumer Rights Act 2015 in consumer contracts), if you're providing a service you must exercise reasonable care and skill. If something goes wrong but you genuinely did take reasonable care, you won't be liable. It's essentially a negligence-based test.

What is the entire obligation rule?

The general rule: a party must perform all of their contractual obligations before they can claim payment. Incomplete performance = nothing owed.

Cutter v Powell 1795 → sailor died mid-voyage; widow received nothing because the entire obligation was to complete the voyage.

Rationale: incentivises complete performance; protects paying party (e.g. from paying for a half-built house).

What is partial performance? How can the breach party get money?

The party in breach may recover a quantum meruit (as much as they deserve) if the innocent party voluntarily accepts partial performance.

Acceptance must be genuinely voluntary → it cannot be voluntary if the work is done on the other party's land (they have no real choice). E.g. a half-finished wedding dress delivered to the client's home → voluntary acceptance is possible

Sumpter v Hedges 1898 → builder on owner's land; could not claim quantum meruit for work done, only for materials the owner chose to use.

What is substantial performance?

If the contract has been substantially performed (only minor/trivial defects remain), the party can claim the contract price minus the cost to remedy defects.

The court looks at both the nature of the defects and the proportion of the contract price needed to remedy them.

Hoenig v Isaacs 1952 → £55 defects in a £750 contract; substantial performance, contract price less £55 awarded.

Bolton v Mahadeva 1972 → central heating pumped fumes, £174 to remedy out of £560 contract; NOT substantial performance.

What are divisible obligations?

If the contract is broken into stages with separate payments for each stage, a party can claim for any completed stage — they need not complete the whole contract. However, each divisible stage is itself an entire obligation — that stage must be fully completed to claim for it. Best practice when drafting contracts: expressly state if obligations are divisible.

What is discharge by agreement?

Parties can agree to end or vary a contract, but that agreement must itself be supported by consideration (or made by deed) to be legally effective. Without consideration, a party can insist on the original obligations being performed.

How is there a discharge by agreement when both parties have outstanding obligations?

Mutual waiver → each party gives up their right to demand the other's performance. Each side's release of the other's obligation acts as consideration for the other's release. No additional consideration needed because the exchange itself provides it.

How to have a discharge by agreement when one party has an outstanding obligation?

The other side has fully performed. The party releasing them from their obligation must receive fresh consideration in return, otherwise the release is not binding and they can enforce the original obligation.

Pinnel's Case 1602 → a promise to accept less than one's legal entitlement must be supported by consideration.

Consideration must be sufficient but need not be adequate — a peppercorn suffices.