1.How A CONTRACT COMES TO AN END
a party who is subject to the obligations of a contract may be discharged from those obligation in one of four ways. The agreement is then at an end. The four ways are:
(a) Performance;
(b) agreement;
(c) breach;
(d) frustration.
Each of these methods of discharge is explained below.
DISCHARGE OF CONTRACT
This is the normal method of discharge. Each party fulfils or performs his contractual obligations_ and the agreement is then ended. As a general rule contractual obligations are discharged only by complete and exact performance. Partial performance does not usually suffice; nor does incorrect performance:
case: Moore v Landauer 1911 .
The contract was for the supply of tinned fruit from Australia packed in cases of 30 this each. The ship was seriously delayed and presumably the buyers no longer wished to accept deliver”. They argued that the sellers had failed to perform the contract since about half the shipment was packed in cases of 24 tins each There was no evidence that this departure from the terms of the contract affected the market value of the goods.
Held: the buyers might reject the goods since they were not of the contract description and 5′) the contract had not been discharged by performance.
2.The other party may prevent performance. In that case the offer (‘tender’) of performance is sufficient discharge. For example, if the buyer will not accept delivery of the contract goods and the seller sues for breach of contract, the seller need only show that he tendered performance by offering to deliver. This will discharge him by performance if he can show that the other party had a reasonable chance to examine whether performance really was tendered – such as whether goods tendered were those ordered. This is because performance only serves as discharge if it is precise. Where the obligation is to pay money, tender of payment must be followed by payment into court to show a continuing willingness to perform.
3.If one party is prevented by the other from performing the contract completely he may bring a / quantum meruit action to claim for the amount of work done: Planche v Colburn 1831.
Time of performance
4.If one party fails to perform at the agreed time he may perform the contract later – the contract continues in force, unless prompt performance is an essential condition. In that case the injured party may refuse late performance and treat the contract as discharged by breach
Where time is not of the essence the injured party may claim damages for any loss or expense caused by the delay but must accept late performance
.5.If the parties expressly agree that `time shall be of the essence’ and so prompt performance is to be a condition, that is conclusive and late performance does not discharge obligations. If they make no such express stipulation the following rules apply.
a)In a commercial contract, time of performance (other than the time of payment) is usually treated as an essential condition.
case: Elmdore v Keech 1969
An advertisement was to be published within 120 days of delivery. Publication was eleven days late.
Held: the party who had supplied the advertisement was entitled to refuse to pay for it. Time was of the essence.
(b ) In a contract for the sale of land (unless it fluctuates in value or is required for business use) equity may permit the plaintiff to have an order for specific performance. even if he is late.
(c )If time was not originally of the essence, either party may make it so by serving on the other (after the time for performance has arrived) a notice to complete -within a reasonable time.
Case: Charles `Rickards v Oppenheim 1950
The contract was to build a Rolls-Royce chassis within seven months. When this period’ expired without delivery the purchaser agreed to wait another three ‘months. As the chat, had still not been built by then, he served a notice requiring completion within 4 weeks; if this were not done he would cancel the order. he did cancel it but the makers tendered delivery three months after he had done so.
Held: although the purchaser had at first waived his rights (by the three month extension) he could, by serving reasonable notice to complete, make time of the essence and treat the contract as discharged if there was no performance within the period of the notice.
Complete performance
1.As a general rule the contract price is not payable unless there is complete performance. There is no ight to demand proportionate payment for partially completed work.
case: Cutter v Powell 1795
employed C as second mate of a ship sailing from Jamaica to Liverpool at a wage for the complete voyage of 30 guineas. C died at sea when he had completed about three quarters of the voyage. C’s widow sued for a proportionate part of the agreed sum.
Held: C w~ entitled to nothing unless he completed the voyage.
2.There are a number, of exceptions, cases where part payment of the contract price may be recovered in exchange for incomplete performance.
a)the contract may provide for performance by installments with separate payment for each of them (a divisible contract)
case: Taylor v Laird 1856
the plaintiff agreed to captain a ship up the River Niger at a rate of f 50 per month. He abandoned the job before it was completed. He claimed his pay for the months completed.
Held: he was entitled to £ 50 for each complete month. Effectively this was a contract that provided for performance and payment in monthly installments.
b)other party may prevent complete performance. The party so prevented from completing is entitled to be paid for what he has done under the doctrine of quantum meruit
c)The other party may accept partial performance and must then pay for if. For example, A orders a dozen bottles of beer from B; B delivers ten which is all he has in stock. A may reject the ten bottles but if he accepts them he must pay for ten bottles at the appropriate rate.
(d)The doctrine of substantial performance may be applied, especially in contracts for building work etc. I the building contractor as completed the essential work and in doing so has completed a very large part of it, he may claim the contract price less a deduction for the minor work outstanding. This may also be regarded as a deduction of damages for breach of warranty where. the contract price is paid.
Case: Sumpter v Hughes 1898
S undertook to erect buildings on the land of H for a price of f 565. S abandoned the work when it was only 60 per cent completed. H completed the work using materials left on his land by S. S sued for
(i) the value of his materials and
(ii) the value of his work (so far as it had not already been paid for).
Held: H must pay for the materials since he had elected to use them but he had no obligation to pay the unpaid balance of the charges for work done by S before abandoning it. It was not a case of substantial performance of the contract.
case: Hoenig v Isaacs 1952
I employed H to decorate I’s flat at a total price of f 750, to be paid as the work progressed. After paying f 400, I objected to the quality of the work and refused to pay the balance for the completed work. The cost of putting right incomplete or defective work was assessed at the trial at f 56.
Held: I must pay the balance owing of the total price of £ 750 less an allowance of £ 56. ,–Since most contracts discharged by performance involve the payment of money, it is necessary to `analyse briefly how money should be applied to a series of debts.
(a)The debtor paying the money may identify at the time of payment to which debt it should be applied. If he pays one of two debts and denies the other’s existence, then it should be inferred that he is not paying the latter.
(b)The creditor receiving the money may identify it at any time as he chooses. This right may be excluded by statute, for example by the Consumer Credit Act 1974.
(c)The rule in Clayton’s Case states that, where there is a running or current account (such as one with a bank or with a major supplier), each payment is appropriated to the earliest debt. This is subject to contrary agreement or express intention.
9.A third party may validly discharge a contract by performance. The validity depends on whether the creditor agrees.
(a)Creditor consents – discharge will be effective only if the third party is an agent of the debtor or if the act is subsequently ratified. Different performance to that required by the contract may then suffice.
(b)Creditor does not consent – discharge is effected provided the contract terms are exactly performed, and so long as the creditor is proved to be indifferent to that mode of performance – that is, he had not stipulated personal performance. It is the debtor and not the third party who is liable however.
AGREEMENT
A contract may include provision for its own discharge by imposing a condition precedent. which prevents the contract from coming into operation unless the condition is satisfied. Alternatively, it may impose a condition subsequent by which the contract is discharged on the later happening of an event; a simple example of the latter is provision for termination by notice given by one party to the other. Effectively these are contracts whereby discharge may arise through agreement.
2.In any other case the parties may agree to cancel the contract before it has been completed: performed on both sides. But the agreement to cancel is itself a new contract for which consideration must be given (unless it is a contract for release by deed).
3.If there are unperformed obligations of the original contract on both sides (it is an executor, /’ contract); each party provides consideration for his own release by agreeing to release th4 other (bi-lateral discharge).
4.But if one party has completely performed his obligations, his agreement to release the other from his obligations (unilateral discharge) requires consideration, such as payment of z cancellation fee (called accord and satisfaction).
5.If the parties enter into a new contract to replace the unperformed contract, the new contract this called novation of the old contract – it is replaced by a new one.
FUNDAMENTAL BREACH
1.in distinguishing conditions and warranties in Chapter 8, it was explained that-‘if one party ,breaks a condition the other may treat the contract as discharged (as in Poussard v Spiers). This is fundamental breach. The injured party may, however, prefer (the option is his) to treat the contract as still continuing despite a breach of condition and merely claim damages for his loss.
2.There is some doubt over the application of this principle to contracts of employment. If the employer dismisses an employee in breach of contract, the latter cannot obtain an order for specific performance by the employer and must accept the dismissal. However, if an employee repudiates his contract, the employer can still enforce against the employee a valid restraint of trade.
Case:Thomas Marshall (Exporters) v Guinle 1978
service agreement of a managing director of a company prohibited him from using confidential information about the company’s customers within five years of leaving its employment. He purported to resign before the contract had expired and solicited business on his own account from the company’s customers.
Held: unilateral repudiation of a contract does not automatically discharge it. The other party may elect to treat it as in force; even though he cannot enforce a contract of employment by requiring an employee to work, he can enforce a restriction as described above.
Anticipatory breach or repudiation
3.A party may break a condition of the contract merely by declaring in advance that he will not perform it when the time for performance arrives, or by some action which makes future performance impossible. The other party may treat this as anticipatory breach and treat the contract as discharged forthwith, or at his option he may allow the contract to continue until ‘ there is an actual breach. In the latter case the party guilty of anticipatory breach may change his mind and perform the contract after all. If the contract is allowed to continue the parties may also be discharged from their obligations without liability by some other cause which occurs later.
Case: Hochster v De La Tour 1853
T engaged H as a courier to accompany him on a European tour commencing on 1 June. On 11 May T wrote to H to say that he no longer required his services. On 22 May H commenced legal proceedings for breach of contract. T objected that there was no actionable breach until 1 June. Held: T was entitled to sue as soon as the anticipatory breach occurred on i 1 May.
Case: Avery v Bowden 1855
There was a contract to charter a ship to load grain at Ode= within a period of 45 days. The ship arrived at Odessa and the charterer told the master that he did not propose to load a cargo. The master remained at Odessa hoping the the charterer would change his mind. Before the 45 days (for loading cargo) had expired the outbreak of the Crimean war discharged the contract by frustration.
Held: the ship-owner, through the master, had waived his right to discharge for anticipatory breach (with a claim for damages). The contract continued and had been discharged later by frustration (war) without liability on either party.
If the innocent party elects to treat the contract as still in force despite the other party’s anticipatory breach, the former may continue with his preparations for performance and recover the agreed price for his services. But any claim for damages will be assessed on the basis o: what the plaintiff has really lost.
Case: White &- Carter (Councils) v McGregor 1961
M contracted with WC for advertising of M’s business. M wrote to cancel the contract but WC elected to advertise as agreed and claimed the agreed payment.
Held: the contract continued in force and WC might recover the agreed price for their services.
Case: The Mihalis Angelos 1971
Charter of a ship to be ‘ready to load at Haiphong’ (in Vietnam) on 1 July 1965. The charterers had the option to cancel if the ship was not ready to load by 20 July. On 17 July the charterers repudiated the contract believing (wrongly) that they were entitled to do so. The ship-owners accepted the repudiation and claimed damages. On 17 July the ship was still in Hong Kong and could not have reached Haiphong by 20 July.
Held: the ship-owners were entitled only to nominal damages since they would have been unable to perform the contract and the charterers could have cancelled it without liability on 20 July
FRUSTRATION (SUBSEQUENT IMPOSSIBILITY)
1.If it is impossible to perform the contract when it is made, there is usually no contract at a – it is void and each party is released from performing any obligation after the frustrating event. In addition, the parties are free to negotiate ‘escape clauses’ or force rrrajeure covering impossibility which arises after the contract has been made. If they fail to do so, they are, : a general rule, in breach of contract if they find themselves unable to do what they have agree to do: Paradine v Jane 1647.
2.The rigour of this principle is modified by the doctrine that in certain circumstances contract may be discharged by frustration. If it appears that the parties assumed that certain underlying conditions would continue, the contract may be frustrated if their assumption prow to be false. An alternative theory of the doctrine of frustration is that the parties should t discharged from their contract if altered circumstances render the contract fundamental different in its nature from the original contract made by the parties. This alternative avoid imputing to the parties assumptions which in fact never occurred to them. They simply did no foresee what would happen. Contracts have been discharged by frustration in the following circumstances.
(a) destruction of the subject matter
Case: Taylor v Caldwell 1863
A hall was let for a series of concerts on specified dates. Before the date of the fir; concert the hall was destroyed by fire. The concert organizer sued the owner of the ha for damages for failure to let him have the use of the hall as agreed.
Held: destruction of the subject matter rendered the contract impossible to perform an discharged the contract. This case was the origin of the doctrine of frustration.
(b) Personal-incapacity to perform a contract of personal service
case: Condor v Barron Knights 1966
C, aged 16, contracted to perform as drummer in a pop group. His duties, when.the group ha work, were to play on every night of the week. He fell ill and his doctor advised that h should restrict his performances to four nights per week. The group terminated hi contract.
Held: a contract of personal service is based on the assumption that the employee’ health will permit him to perform his duties. If that is not so the contract is discharge by frustration. (NB not every illness discharges a contract of personal service – person< incapacity must be established).
case: F C Shepherd & Co Ltd v jerrom: 1986
J entered into a contract of apprenticeship with S & Co. Subsequently he was sentenced to period of borstal training following a conviction for conspiring to assault and to cause affray. He served 39 weeks. The employers told J’s father that they were not prepared t take J back.
Held: the contract has been discharged by frustration.
Other instances of frustration in this category are where the person dies, is called up for military service or is interned in wartime.
c)Government. intervention or supervening illegality
case: Re Sip ton. Anderson & Co etc 1915
The contract was for the sale of wheat stored in a Liverpool warehouse. It was requisitioned by the government under emergency wartime legal powers:
Held: it was no longer lawful for the seller to deliver the wheat. The contract had been discharged by frustration. Supervening illegality, e.g. owing to outbreak of war (as in Avery v Botivden), or government intervention to restrain or suspend performance of the contract is a common cause of frustration.
d)Non-occurrence of an event if it is the sole purpose of the contract
case: Krell v Henry 1903
A room overlooking the route of the coronation procession of Edward VII was let for the day of the coronation for the purpose of viewing the procession. The coronation was postponed owing to the illness of the King. The owner of the rooms sued for the agreed fee. Held: the contract was made for the sole purpose of viewing the procession. As that event did not occur the contract was frustrated.
Case: Herne Bay Steamship Co v Hutton 1903
A steamboat’ was hired for two days to carry passengers round the naval review at Spithead which had been arranged as part of the coronation celebrations. The review was cancelled owing to the King’s illness but the steamboat could have taken passengers for a trip round the assembled fleet.
Held: the royal review of the fleet was not the sole occasion of the contract. The owner of the steamboat was entitled to the
agreed hire charge less what he had earned from the normal use of the vessel over the two day period.
e) interruption which prevents performance of the contract in the form intended by the parties
Case Jackson v Union Marine Insurance Co 1874
contract for a charter of a ship to proceed immediately to load cargo for San Francisco. Off the coast of Wales the ship went ashore and could not be re floated for a month. Thereafter she would need repairs to make her fit for the voyage. Meanwhile the charterers hired another vessel.
Held: the interruption had put an end to the contract in the commercial sense – it was no longer possible to perform the contract intended. The contract was discharged by frustration. There are numerous other interruption cases. In deciding whether it is a case of frustration the test applied is whether the interruption takes away from the agreed duration of the contract so much of it as to alter the fundamental nature of the contract _ insofar as it can be performed at all: contrast the Tsakiroglou Case in the next paragraph.
3A contract is not discharged by frustration in the following circumstances.
a) If an alternative mode of performance is still possible
case : Tsakirogtou & Co v No61ee and Thor( GmbH 1961
contract for sale of 300 tons of Sudan groundnuts c.i.f Hamburg. The normal and intend method of shipment from Port Sudan (on the Red Sea coast) was by a ship routed through t Suez Canal to Hamburg. Before shipment the Suez Canal was closed; the sellers refused ship the cargo arguing that it was an implied term that shipment should be via Suez alternatively that shipment via the Cape of Good Hope would make the contract’ commercial and fundamentally’ different, so that it was discharged by frustration.
Held: both arguments failed. There was no evidence to support the implied term argument nor was the use of a different (and more expensive) route an alteration of the fundament nature of the contract-sufficient to discharge it by frustration.
b) If performance becomes suddenly more expensive
case: Davis Contractors v Fareham UDC !956
DC agreed to build 78 houses at a price of 194,000 in eight months. Labour shortages ca the work to take 22 months and cost £ I I5,000. DC wished to claim frustration so that the could then claim for their work on a quantum meruit basis.
Held: hardship, material loss or inconvenience did not amount to frustration; t obligation must change such that the thing undertaken would, if performed, be a different thing from-that contracted for.
c)If one party has accepted the risk that he will be unable to perform
Case: Budgett & Co v Binnington & Co 1891
ill of lading provided that if the consignee could not unload his cargo within ten day demurrage (compensation) would be payable. A strike prevented the unloading during the te days.
Held: the consignee had accepted the risk and must pay the demurrage as agreed.
d).if one party has induced frustration by his own choice between alternatives
Case: Maritime National Fish v Ocean Trawlers 1935
Contract for the hire of a trawler for use in otter trawling. The hirers had four other trawlers of their own_ They applied to the Canadian government for the necessary licence for five trawlers but were granted only three licenses. They nominated three of their own trawlers for the licenses and argued that the contract for the hire of a fifth trawler ha been frustrated since it could not lawfully be used.
Held: the impossibility of performing the hire contract was the result of a choice mad by the hirers: the trawler on hire could have been nominated for one of the three licence This was not a case for discharge by frustration.
4.In most cases the Fights and liabilities of parties to a contract discharged by frustration are regulated by the Law Reform (Frustrated Contracts) Act 1943as follows.
(a)Any money paid under the contract by one party to the other is (subject to rule (b) below) to be repaid. Any sums due for payment under the contract then or later cease to be payable. .
(b)A party who is liable under rule (a) to repay money received (or whose entitlement to payments already accrued due for payment at the time of frustration is cancelled), may at the discretion of the court be allowed to set off (or to recover) out of those sums the whole or part of his expenses incurred in performing the contract up to the time when it is discharged by frustration. But he cannot recover from the other party his expenses insofar as they exceed sums paid or due to be paid to him at the time of discharge.
(c)If either party has obtained a valuable benefit (other than payment of money) under the contract before it is discharged, the court may in its discretion order him to pay to the other party all or part of that value. If, for example, one party has delivered to the other some of the goods to be supplied under the contract, the latter may be ordered to pay the amount of their value to him.
5. Various special types of contract are excluded from the provisions of this Act. Contracts for the carriage of go bds by sea, contracts of insurance and contracts for the supply of specific goods if frustrated by the perishing of the goods are not regulated by the Act but by other rules.
6.Where these rules do not apply, the common law provides that the loss shall lie where it falls; money paid before frustration cannot be recovered and money payable at the time of frustration remains payable, unless there is a complete failure of consideration.
Case: Fibrosa v Fairbairn 1942
B placed an order for machinery to be delivered in Poland. He paid £ 1,000 with his order. Shortly afterwards the outbreak of the Second World War frustrated the contract since Germany occupied Poland. B sued to recover his £ 1,000.
Held: the deposit was repayable since B had received absolutely nothing for it – there had been a total failure of consideration.
SUMMARY
Although the rules on fundamental breach and frustration are important for both examination and real-life purposes, you should always remember that the vast majority of contracts are ‘ discharged by due performance of the agreed terms. Therefore the rules on what constitutes complete performance, and the time at which performance should be tendered, are also very important.