Lecture 10
Overview of Discharge and Termination of Contract
General Definition of Discharge: A contract can be terminated or discharged through several distinct mechanisms where the parties are released from their contractual obligations.
Methods of Termination:
Performance: Occurs when all parties involved fulfill their respective obligations as specified in the agreement.
Agreement: Occurs when the parties mutually agree to no longer continue with the contract.
Operation of the Law: Occurs when the contract is terminated independently of the parties' intentions by the law itself. Common examples include bankruptcy and mergers.
Frustration: Occurs due to an unforeseen event that makes the performance of the contract impossible or radically different from what was originally intended by the parties.
Breach: Occurs through the breach of a condition or a repudiatory breach by one of the parties.
Termination by Frustration
Definition: Frustration is an unforeseen event that renders the contract impossible to perform or transforms the performance into something fundamentally different from the parties' original intentions.
Limits to the Doctrine of Frustration: Frustration does not apply in every instance of difficulty. The following conditions or situations limit the application of this doctrine:
Mere Hardship or Inconvenience: Frustration will not occur simply because performance has become more difficult, more expensive, or results in a material loss. If performance is still possible, it is not frustrated.
Case Study: Tsakiroglou v Noblee Thorl [1962] AC 93
Facts: A contract involved the sale of peanuts to be shipped from Sudan to Hamburg. The original route was through the Suez Canal. However, the canal was closed to navigation. The alternative route required traveling around the Cape of Good Hope, which was approximately times longer and significantly more expensive.
Defendant Argument: The sellers failed to ship the goods, claiming the closure of the Suez Canal frustrated the contract.
Held: The contract was not frustrated. While the route was more expensive and took longer, it was not fundamentally different. Performance was still possible without damaging the peanuts.
Contractual Provisions: No frustration occurs if the contract already contains a clause providing for the specific event that occurred.
Foreseeability: If the frustrating event was foreseeable by the parties at the time the contract was formed, the doctrine cannot be invoked.
Self-induced Frustration: Frustration cannot be relied upon if the event occurred due to the fault (an act or omission) of the party seeking to claim frustration.
Case Study: The Eugenia [1964] 1 All ER 161
Facts: The vessel The Eugenia was chartered in for a trip from Genoa to India. The contract included a "war clause" barring the charterers from entering a "dangerous zone." Despite this, the charterers entered the Suez Canal when it was a dangerous zone and became trapped when war broke out.
Held: The contract was not frustrated because the vessel was trapped as a result of the charterers' own fault. They could not rely on self-induced frustration.
Consequences of Frustration
Automatic Discharge: The contract is automatically discharged from the exact moment the frustrating event occurs. From that point forward, parties are no longer obliged to perform their future contractual duties.
Recovery of Payments:
Money paid prior to the frustrating event is recoverable only if there has been a total failure of consideration.
Total Failure of Consideration: This means that the party who paid the money received absolutely nothing in exchange from the other party. In such cases, the other party must refund the total sum.
Partial Performance: If any benefit or part of the contract has been received, "the loss will lie where it falls." This means money paid cannot be recovered, which can be problematic if one party (Party X) has incurred significant expenses in preparatory work but has not yet delivered anything to the other party (Party Y).
Case Study: Fibrosa Spolka Akcyjna v Fairbairn, Lawson, Combe, Barbour, Ltd [1942] 2 All ER 122
Facts: Fibrosa (a Polish firm) agreed to buy machinery from Fairbairn (an English firm). On , Fibrosa paid a deposit of . On , Germany invaded Poland. On , Britain declared war on Germany, making it illegal for English companies to trade with the enemy. Fibrosa requested the return of the deposit.
Defendant Argument: Fairbairn refused, claiming they had performed considerable work on the machinery and that under frustration, losses should lie where they fell.
Held: The deposit was recoverable. Because Fibrosa had received no machinery, there was a total failure of consideration. Lord Wright stated: "A man who pays money in advance on a contract which is frustrated and receives nothing for his payment is entitled to recover it back."
Important Nuances of the Fibrosa Principle:
The principle only applies if nothing was received. If Fibrosa had received even a small part of the machinery, they would have been unable to recover the under common law.
The common law approach to partial failure of consideration is often viewed as unfair or inequitable.
Statutory Overrides in Australia: To address the unfairness of the common law, specific statutes have been passed in several Australian states to overrule the common law regarding partial failure of consideration:
Victoria: Part 3.2 of Australian Consumer Law Fair Trading Act 2012 (VIC)
New South Wales: Frustrated Contracts Act 1978 (NSW)
South Australia: Frustrated Contracts Act 1988 (SA)
Contractual Avoidance: Parties can avoid these legal outcomes by explicitly specifying in the contract terms what should be paid or refunded if the contract is terminated.
Termination by Breach
Concept of Breach: A breach occurs when a party fails to perform contractual obligations or indicates an unwillingness to perform them.
Categories of Breach:
Actual Breach: Failure to perform when the time for performance has arrived.
Repudiation / Anticipatory Breach: Failure to show willingness or ability to perform before the time for performance is due.
Remedies Based on Term Classification:
Condition: Breach allows for termination of the contract and the pursuit of damages.
Warranty: Breach allows for damages only; the contract cannot be terminated.
Innominate Term: Remedies depend on the severity and classification of the actual breach.
Actual Breach vs. Repudiation
Actual Breach Details: Occurs when performance is due, and a party fails to perform part or all of the contract. This happens through:
Failure to perform: Refusal to perform or inability to perform when the deadline arrives.
Defective performance: The contract is performed, but terms are breached (the result is not what was envisaged).
Repudiation Details: Occurs when a party manifests an unwillingness or inability to perform a substantial part of the contract (either the whole contract or a fundamental obligation).
Anticipatory Breach Details: This is a form of repudiation where the obligation is rejected prior to the set performance time.
Innocent Party Options:
Accept the breach, terminate the contract immediately, and sue for damages.
Keep the contract "on foot," wait until the time for performance arrives, and then sue for specific performance or actual breach based on actual losses sustained.
Conduct Amounting to Repudiation:
Express Statement: A party explicitly states they are unwilling or unable to perform.
Conduct Inference: Repudiation can be inferred from conduct if a reasonable person would conclude the party is unable or unwilling to perform.
Case Study: Lovelock v Franklyn (1846) 8 QBD 371
Facts: Dell agreed to sell land to Lovelock for . Lovelock had years to pay. However, before the years passed and before payment was made, Dell sold the land to a third party named Williamson.
Held: By selling the land to Williamson, Dell precluded the possibility of selling to Lovelock. This conduct constituted an anticipatory breach. Lovelock was entitled to recover damages immediately.