5. Discharge of a Contract

Discharge of a contract refers to how a contract comes to an end or how its future obligations are extinguished.

  • Contracts may be discharged by performance, agreement, breach, or frustration.

A. Discharge by Performance

A contractual obligation can be discharged by complete performance of that obligation.

Exceptions to Complete Performance:

  1. Substantial Performance

Substantial performance of the central purpose of the contract but with some minor defects entitles the other party to pay an adjusted amount reflecting the defects/subpar performance

  • Often seen in construction or installation contracts

  • General Rule: if cost to fix is less than ¼ of the price, courts may find substantial performance.

  1. Partial Performance:

If one party only partially performs the work, the other party may voluntarily accept this partial performance and compensate based on a quantum meruit basis, meaning they pay only for the value of the work done rather than the entire contract amount.

  • Acceptance must be a genuine choice/option. If the client had no choice (e.g. work done on their land), they may not have to pay.

  • Sumpter v Hedges (1898): Builder left job halfway through. Defendant finished the work but used leftover materials. Court said the owner had no choice but to accept. He had to pay only for the materials used.


3. Wrongful Prevention

If a party is prevented from completing contract obligations by the other party, they can either claim damages for breach of contract or quantum meruit for the work completed so far.

  1. Statutory Exceptions: s15 SOGA

A slight breach would be unreasonable to repudiate (reject) the contract - instead, the other party may claim damages under breach of warranty.

B. Discharge by Agreement

A contract can be discharged by mutual agreement via either option:

  1. Waiver: Both parties agree to cancel the contract.

    • part payment of debt is awarded if one party partially performed while the other performed no obligations

  2. Contract Terms: Occurs when specified termination conditions in the contract are met, such as a party serving notice to terminate, if a material breach clause allows one party to exit the contract upon breach, or if a contractual end date has been specified.

C. Discharge by Breach

Breach gives the innocent party the right of election (choose to terminate future obligations and sue for damages or affirm the contract while claiming damages)

Types of Breach:

  1. Repudiatory Breach: A serious breach allowing the innocent party to terminate and claim damages, or affirm and claim damages

  1. Anticipatory Breach: When one party indicates they will not perform before the breach occurs.

    • Innocent party can terminate and claim damages from date of refusal, or affirm contract but prove a legitimate interest in doing so.

D. Discharge by Frustration

Frustration arises from unforeseen events that render the contract incapable of being fulfilled, without fault from either party — often used as a defense for breach/non-performance of contract

Frustration only applies if the event:

  1. Is outside the control of both parties;

  2. Is unforseeable; and

  3. Makes performance radically different or impossible to perform, e.g.:

    • destruction of the subject matter of the contract

    • death, illness, or incapacity of a contracting party

    • contract becomes illegal to perform

    • intervention by the government

    • excessive delay (only if commercial purpose of the contract was defeated)

    • purpose of the contract no longer exists

Frustration will not operate where the unforeseen event only delays, interrupts, or makes it more expensive to perform the contract (e.g. covid)

 

Limitations to Frustration and Recovery

  • Limitations:
       1. Contracts remaining difficult or costly do not qualify for frustration.
       2. If the unforeseen event was an inherent risk or foreseeable at the contract's inception, frustration will not apply.
       3. Self-induced frustration occurs when the frustrating event was the fault of the party seeking the defense.
       4. If a contractual provision addresses the risk (e.g., a force majeure clause), then frustration does not apply.

  • Recovery Mechanisms:
      1. Common Law:
         - Once the contract is frustrated, parties are released from obligations. Any advance payments may only be returned if there is a total failure of consideration.
      2. Law Reform (Frustrated Contracts) Act 1943:
         - Money paid in advance is recoverable without needing to show total failure of consideration; however, expenses incurred by the party suffering the frustration may be deducted.
         - If benefits from partial performance are gained before frustration, that benefit may need to be compensated, as decided by the court.