By Law Teacher
6.1.1 Agreement, Performance and Breach – Introduction
Welcome to the sixth lesson of this module guide – agreement, performance and breach! A discharge of obligations means that parties to the contract are no longer liable for any terms of the agreement, and no further promises may be enforced. There are a number of ways in which this can occur, including agreement, performance and breach. Each of these must be understood in order to understand when a party may be discharged from their obligations under a contract.
The chapter begins with the requirements for a contract to be discharged through agreement, before repeating this for performance and breach. These requirements are examined in turn with the key case law outlined. The different types of conditions are later considered with examples given to help with a practical understanding
Below are some goals and objectives for you to refer to after learning this section.
Goals for this section
- To understand the importance of performance, agreement and breach to discharge a contract
- To understand what these three ways are
- To understand the different principles governing discharge of contract
Objectives for this section
- To understand what is meant by a discharge by agreement and its requirements
- To understand the difference between an agreement to replace, and an agreement to alter obligations
- To understand what is meant by discharge by performance and types
- To be able to distinguish between strict contractual obligations and qualified contractual obligations
- To understand what is meant by a discharge by breach
- To be able to assess whether a breach will amount to repudiatory
- To understand the different types of term that may be breached
6.1.2 Agreement, Performance and Breach Lecture
Discharge by Agreement
To discharge a contract through agreement there are two simple requirements:
- The discharge is mutual
- The consent is free
However, what happens if there is a subsequent change of heart by one party, and they wish to re-enforce their obligations? At that point, the contract may be re-enforced, as the agreement to discharge obligations has no legal grounds, despite it being a perfectly valid agreement.
Forming a discharge agreement
In order to create a binding agreement to discharge obligations under a contract, there must be valid consideration – The Hannah Blumenthal [1983] 1 AC 854. There is an exception to the general rules of consideration in relation to discharge agreements – ‘Mutual release exception’. The mutual release exception rules that in a discharge agreement, the mutual abandonment of obligations under a separate contract amounts to valid consideration.
Where only one party’s obligations remain
There may be a situation in which one party has performed their obligations under the contract, and only one party’s obligations remain. Under these circumstances, a regular agreement to discharge obligations will not be valid or binding. The parties must enter into a binding release via a deed.
Agreement to replace obligations
Parties may also make an agreement similar to a discharge agreement, but instead of simply discharging the obligations, it also replaces those obligations with new ones under a separate contract – Compagnie Noga D’Importation et D’Exportation v Abacha (No. 4) [2003] EWCA Civ 1100.
Agreement to alter obligations
Parties may also only discharge certain parts of the contract, by severing the unwanted terms from the main contract, then either choosing to replace those terms or simply leave the contract without the removed terms. In order for a party to enforce such an alteration, there must be consideration for the discharge or variation of the obligation.
Part-payment of a debt is not valid consideration, as we have discussed in the consideration chapter (Pinnel’s Case(1602) 5 Co Rep 117a).
Discharge by Performance
In order to discharge a contract by performance, both the express and implied terms must be performed. There are two different types of performance:
- The strict contractual obligations
- The qualified contractual obligations
Strict contractual obligation
Strict obligations must be fulfilled before a contract can be discharged for completed performance. Excuses as to why an obligation could not be fulfilled will not be sufficient.
Qualified contractual obligations
Qualified obligations will not have to result in a specific outcome; the obligation will be to perform to a standard.
If you can identify that all of the contractual obligations have been met in full, the obligations under the contract may be discharged.
Discharge by breach
Breach of contract
The general definition of a breach of contract is where there is a failure or refusal by one or both of the parties to perform one or all of the obligations imposed upon them under the contract.
Repudiatory breaches
There are some tests and presumptions in order to assess whether a certain breach will amount to repudiatory:
- What type of term has been breached?
- Are the obligations ‘entire’?
- Has the party in breach indicated an intention to abandon the contractual obligations?
The conduct must also be clear and unequivocal as to intent to abandon the contract. Alfred Toepfer International GmbH v Itex Itagrani Export SA [1993] 1 Lloyd’s Rep 360 is authority for the general threshold as being: apparent, on the balance of probabilities, that the party cannot or will not perform their obligations.
The more recent case of Eminence Property Developments Ltd v Heaney [2010] EWCA Civ 1168 further developed this test.
Type of term breached
The type of term breached can result in a presumption that the contract has been breached and thus releases both parties from their obligations. Therefore, one of the key parts of a question relating to breach of contract is to identify whether the term breached can be classed as one of these:
- Conditions
- Condition subsequent
- Condition precedent
- Condition
- Warranties
- Innominate terms
Contingent conditions
A Condition should first be distinguished from a condition precedent and a condition subsequent. Conditions precedent and subsequent are ‘contingent’ conditions. Which therefore means a contract cannot be discharged for breach of a condition precedent or subsequent.
A condition precedent is a condition which must be met before to any contractual liability can incur. A breach of a condition precedent is valid and will not usually result in any remedies so long as the parties do not prevent the occurrence of the condition precedent (Mackay v Dick(1881) 6 App Cas 251.
A condition subsequent is a condition which will terminate the existing contractual obligations.
Conditions
A condition is a term which is central to the contract. When attempting to identify a condition, the question to ask yourself would be: if this term was breached, would the whole nature of the contract change?
If a condition is breached, the innocent party has a choice to do one of two things:
- Affirm the breach of contract, and continue to be party to the contract
- Terminate the contract, which releases both parties from all of the obligations under the contract
Warranties
A warranty is a term which is not central to the contract. Therefore, a breach of a warranty will not result in an option to terminate the contract. A breach of warranty can be adequately compensated for with damages.
Innominate terms
An innominate term is somewhere between a condition and a warranty. If the breach is more serious, it is likely the innocent party will be given the option to repudiate the contract. If the breach is less serious, the only available remedy will be damages.
Breach of condition v serious breach of innominate term
BS & N Ltd v Micado Shipping Ltd (The ‘Seaflower’) [2001] 1 Lloyd’s Rep 341 – condition or an innominate term?
- Express conditions
- Condition by precedent
- Designated by contract or consequences
- Nature of the contract
Express conditions refer to where a statute expressly states that a particular term or type of term is to be a condition.
Where a statute expressly classifies a certain term as a condition, it is irrelevant if the breach is extremely trivial and has little or no impact, the fact that statute has classified it as a condition means a breach will result in a valid repudiation of the contract – Arcos v EA Ronaasen & Son [1933] AC 470.
The second rule is that where a certain term has been previously categorised as a condition in another judicial decision, the term should be treated as a condition.
The court will not usually categorise the exact wording of a term as a condition, but more so the idea and aim of the term – Bunge Corporation v Tradax Export SA Panama [1981] UKHL.
The third rule is that a term will be a condition if it is designated so in the contract or the contract states the consequence of a breach of the term will be that the innocent party may repudiate the contract. In order for this rule to operate, it must be express and very clear that this was the intention of the parties.
The simple use of the word ‘condition’ will not usually be enough. The term defined as a condition must be considered in the context of the whole contract – is it consistent with the rest of the terms? The term must simply highlight its importance to the contract.
The fourth rule is that a term is a condition where the nature of the contract, subject matter or the circumstances of the contract imply that a breach of the term would obviously mean that the innocent party could discharge their obligations under the contract.
The courts will consider the importance of the term in the context of the contract as a whole – Samarenko v Dawn Hill House Ltd [2011] EWCA Civ 1445.
If the innocent party relies on a trivial breach in order to repudiate the contract for an ulterior motive, the breached term is treated as an innominate term – The Hansa Nord [1976] QB 44.
A term that is not even included in the contract may be implied as a condition dependent on the commercial circumstances.
Entire obligations
An obligation that is necessary in order for the other party to perform their obligations under the contract. If an entire obligation is not completed this will constitute a repudiatory breach, allowing the innocent party to terminate the contract.
The entire obligations rule does not always apply to the payment of instalments. If the breach is not sufficiently serious, the other party will only be liable for damages – Section 31(2) SGA 1979.
If the entire obligations rule is not operative, a number of minor breaches could have the cumulative effect of a repudiatory breach – Rice v Great Yarmouth Borough Council [2003] TCLR 1.
The courts may also waive the entire benefit rule where the innocent party accepts the partial performance and opts to keep any benefit derived from it – Sumpter v Hedges [1898] 1 QB 673.
Following the acceptance, an implied secondary contract is formed. This rule can only operate where the innocent party has no choice whether or not to accept the benefit – Sumpter v Hedges.
If the extent of the failure to perform is small in comparison to the performance they have undertaken, the courts have been willing to waive the entire obligation rule and prevent the innocent party from repudiating the contract.
The innocent party will however be able to claim damages, or offset the price of payment against the extent of the breach (Hoenig v Isaacs [1952] 2 All ER 176
In order to assess whether the performance is substantial enough, the seriousness of the breach should be considered in the context of the contract as a whole.
Intention to breach – anticipatory breaches
Obligations under a contract may be discharged even before a breach has occurred if one party indicates an intention to breach the contract – Yukong Line of Korea v Rendsburg Investments Corporation of Liberia [1996] 2 Lloyd’s Rep 604.
The anticipatory breach rule is justified by the fact that the innocent party will be aware the other party intends to breach the contract, but can do nothing about it and will have to wait until the breach actually occurs before they may claim for damages or repudiate the contract.
A party can show their intention to breach the contract through an express statement, but the intention may also be inferred from certain conduct. The conduct must also be clear and unequivocal as to intent to abandon the contract – Alfred Toepfer International GmbH v Itex Itagrani Export SA [1993] 1 Lloyd’s Rep 360.
Eminence Property Developments Ltd v Heaney [2010] EWCA Civ 1168 – from the perspective of a reasonable person in the non-breaching party’s position, has the other party shown a clear intention to abandon and refuse to perform?
The innocent party can choose to repudiate the contract, or affirm the intended breach – Fercometal SARL v Mediterranean Shipping Co. SA [1989] AC 788. However, there are some limitations on the innocent party’s ability to affirm the breach.
The affirmation of an anticipatory breach must be clear and unequivocal, and there must be evidence to this effect (Yukong Line Ltd of Korea v Rendsburg Investments Corporation of Liberia [1996] 2 Lloyd’s Rep 604). The reason for this is that the affirmation of an anticipatory breach is irrevocable under most circumstances.
Where an innocent party intends to terminate the contract as a result of the anticipated breach, they must make it clear to the party in breach that they are terminating the contract – Vitol SA v Norelf Ltd, The Santa Clare [1996] AC 800.
The innocent party does not need to wait until the date of the supposed performance of the contract (Hochster v De La Tour(1853) 2 E & B 678.
6.1.3 Agreement, Performance and Breach Lecture – Hands on Example
The following section will test how well you understand the content on discharge of obligations under a contract. This is mostly a case of being able to identify the different types of repudiatory breaches.
After studying the detailed chapter on discharge you should be able to identify the issues in these questions and apply the law correctly. The answers for the questions can be found at the very bottom of this page.
A question on discharge of obligations should be easily identifiable by the fact there will be a breach or purported breach. The question is likely to ask you if the innocent party can discharge their obligations under the contract. The below example should allow you to get a general idea of how questions involving discharge of a contract may appear.
When addressing an issue involving the discharge of a contract, this would be an appropriate method:
- Is there an agreement to discharge the obligations under the contract?
- Has the contract been fully performed so to discharge the obligations under the contract?
- Has there been a breach of the contract?
- If there has been a breach, will it amount to a repudiatory breach under one of the three categories (type of term, entire obligations or an anticipatory breach)?
This step-by-step approach will cover all of the potential discharges of obligations and ensure you do not miss one. You will need to have knowledge of the relevant legal principles and relevant cases once you manage to identify the relevant method of discharge.
Scenario
Claire owns a very successful ice-cream business, owning a number of stores over the country. She has formed a number of contracts which she is concerned about. She would like some advice on whether she has to continue under the contracts or might be able to opt out of them in some way.
- The first contract Claire has is with a supplier of industrial ice-cream machines for the opening of five new stores. The ice-cream machines are worth £10,000 each and this supplier is the only one in the country. Claire has ordered five of these machines but the supplier has only given her four, and has told her they do not have the fifth one.
What is the result of this breach of contract? Can Claire repudiate the whole contract? Ideally, Claire would like to keep the four machines.
- Claire is not particularly happy with the price of her leasehold agreement in her Nottingham store. After speaking to the owner of the store next to her, she has found out they are paying half the price that she is. After learning this, Claire wishes to attempt to discharge her obligations under the lease and renegotiate the price. After studying the contract, Claire has found a term which states ‘it is a condition of the contract that the property will be re-painted by the owner of the land before the tenancy starts’. The tenancy has started and the property was not re-painted.
Can Claire rely on the breach of this condition in order to discharge her obligations under the contract?
- Claire has a contract with John for the supply of ingredients for her ice cream. The contract runs for another six months, but both parties wish to discharge their obligations under the contract.
Can they do so, and if so, how should they go about this?
- This contract may be repudiated under the entire obligations rule, outlined by Cutter v Powell (1795) 6 TR 320 – the entire obligation of providing the five machines is necessary in order for Claire to pay them the full sum.
However, the courts are unwilling to apply this rule, and there are a few exceptions which the courts will apply. In this case, the substantial performance rule may be applicable. Where the extent to fail to perform is small in comparison to the performance the court will waive the entire obligation rule and prevent the repudiation of the contract.
In this case, as Claire wants to keep the four machines, it is best to argue the substantial performance rule. The case of Hoenig v Isaacs [1952] 2 All ER 176 confirms that Claire will be able to offset the price of payment against the loss, and would therefore only have to pay £10,000 for each of the four machines received. Four out of five machines is a substantial performance, despite the high value of the goods.
- If there is a breach in a contract of a condition, the innocent party may terminate the contract and release both parties from their obligations. Therefore, on the face of it, if a condition has been breached it seems like Claire can repudiate the contract. However, the simple fact that a term has been classified as a condition does not always mean it is a condition. The case of Schuler AG v Wickman Machine Tool Sales Ltd [1973] UKHL 2, shows us that if a term classified as a ‘condition’ is inconsistent with the rest of the contract, it will not be a condition. On the facts of this case, we do not know if it is inconsistent with the rest of the contract, therefore it is likely to be classed as a condition.
The case of The Hansa Nord [1976] QB 44 rules that if a party relies on a trivial breach of a condition in order to repudiate the contract for an ulterior motive the term will not be classed as a condition. This seems to be the case here – the breach of not re-painting the store seems trivial, and Claire is attempting to repudiate the contract because she is unhappy with the price of the lease. Therefore Claire could not rely on the breach of condition to repudiate the contract.
- If the parties freely agree to a discharge, the contract can be discharged through agreement. There must be a secondary contract formed which agrees to discharge the first contract, and this secondary contract must have valid consideration (The Hannah Blumenthal [1983] 1 AC 854.
The parties will not need to supply consideration for the secondary contract under the normal way; the ‘mutual release exception’ will apply to the contract. Valid consideration is formed by the mutual abandonment of the obligations under the first contract.
Therefore, it is clear Claire and John can discharge their agreement by simply forming a secondary contract to discharge the first one.