1

A2 LAW - BOOK 4

DISCHARGE OF A CONTRACT

TOPICS: 1. DISCHARGE 2. FRUSTRATION

TEACHERS: MISS S. STANDING (HEAD OF LAW) & MR A. HOWELLS www.loretolaw.blogspot.com

2

Discharging a contract means the parties are released from their obligations. A contract can be discharged in the following ways:

1. Performance – ________________________________________________________ ______________________________________________________________________ 2. Agreement – _______________________________________________________ ______________________________________________________________________ 3. Breach – ________________________________________________________ ______________________________________________________________________ 4. Frustration – ___________________________________________________________ ______________________________________________________________________

2. PERFORMANCE

a) Total Performance

b) Substantial Performance

c) Partial Performance

d) Time

e) Vicarious performance

f) Tender of performance

g) Prevention of performance

3

THE STRICT RULE OF TOTAL PERFORMANCE

§ Performance must be exact to be complete. Cutter v Powell (1795) Cutter was 2nd mate on a ship travelling from Jamaica to Liverpool, and had committed himself to the whole journey when he signed the contract. The journey lasted from 2nd August to 9th October; however Cutter died on 20th September. Held: As the Cutter did not complete the voyage (as he died) his widow could not claim his wages. Re Moore & Landauer (1921) Fruit was ordered in cases containing 30 tins; however it was supplied in the wrong size cases. Held: This meant the exact requirements of the contract had not been met. The buyer could reject the whole lot.

AO2

SUBSTANTIAL PERFROMANCE

§ The contract is almost complete but not quite. § Money will have to be paid but the court deducts the amount required to complete the work. § The amount left to complete should only be a minor amount, and amount to a breach of

warranty. (If it was serious enough to amount to a breach of condition then the injured party could repudiate).

§ There is a small compromise between the parties. Boone v Eyre (1779) A plantation was sold, complete with slaves, but on transfer of ownership it was found that the slaves had gone. Substantial performance had taken place, as the main subject of the contract was the land, which was still there.

4

Hoening v Isaacs (1952) A flat was to be decorated and furnished for £750, but when the work was over, the customer paid only £400, arguing that the work was not yet complete. Held: Although there were defects, the cost of putting these right was far less than the amount deducted. Therefore, it was substantial performance, so £695 had to be paid as it would cost £55 to remedy the defects.

AO2

PARTIAL PERFORMANCE

§ The amount of work done is less than that for substantial performance. § It is sometimes difficult to differentiate between partial and substantial performance. § 2 important points must be noted for partial performance:

1) To discharge the contract, partial performance must be accepted by the other party.

2) Payment is made on a quantum meruit basis – as much as deserved for the work completed. So if half the work was completed, half the money would be payable.

Christy v Row (1808)

a) The parties discharge the contract by agreeing to pay only for the work done; b) The party not at fault must have genuinely agreed to end the contract.

Sumpter v Hedges (1898) A builder who only completed half of the work towards building houses and stables sued for full payment. The court did not allow this and also rejected the idea of partial performance. This is because when the builder left, the home owner had no choice. Partial performance had not been accepted by the owner, so the contract was simply breached.

5

TIME

§ Traditionally failure to perform on the due date is a breach of warranty that entitles the injured party to claim damages only, rather than repudiation.

§ But, when time is an important element in a contract, it is seen as being ‘of the essence’. § Therefore, where time is of the essence it will be viewed as a term of the contract and the

contractual obligations must be performed within the time expected. § The importance of time (i.e. deadlines) must be clear to both sides. § There are three situations where time of performance will be considered to be of the essence,

and when a repudiation will be available as a remedy for the breach of the contract:

1) Where the parties have made an express stipulation in the contract that time is of the essence.

2) Where the surrounding circumstances of the contract show that time of performance is crucial, e.g.

3) Where 1 party has already failed to perform his obligations under the contract. In this case the other party is able to stipulate that unless performance is completed within a set period, repudiation will occur.

VICARIOUS PERFORMANCE § Another person carries out the contract, instead of the original party contracted with. § This will be allowed in certain circumstances – depending on the nature of the contract. § If it is of a general nature, then vicarious performance will be allowed.

E.g.

§ If it is of a personal nature, then vicarious performance will not be allowed. E.g.

6

Edwards v Newland (1950) This case concerned the storage of furniture in a warehouse, and it was said that the personal skill and care of the warehouseman is “of the essence” in such a contract. Held: That as the personal nature of the warehouseman in the contract was of the essence, passing the property on to another person to store was unacceptable. Vicarious performance was not allowed.

TENDER OF PERFORMANCE

§ This occurs where a party has offered to complete all of his obligations under the contract, but the other party has unreasonably refused to accept performance.

§ In these situations, the party tendering performance is entitled to sue and to recover under

the contract. § He may also consider his own obligations as being discharged even though there has been

no performance. Startup v Macdonald (1843) The contract was for 10 tonnes of linseed oil to be delivered by the end of March. The seller delivered at 8.30 on 31st March, which was a Saturday, so the buyer refused to accept delivery. Held: The seller was able to claim that he had tendered performance and recover damages as a result.

PREVENTION OF PERFORMANCE § Where a party to a contract prevents the other party from carrying out his obligations

under the contract because of some act or omission then the strict rule cannot apply.

§ In these circumstances, the party trying to perform may have an action for damages. Planche v Colburn A publisher was planning to produce a series of books on a particular theme, and hired an author (the claimant) to write one of the books in the series. When the publisher decided to abandon the series, the author was prevented from doing the work by no fault of his own, and he had already done a lot of work for the book. Held: The author was entitled to recover half the fee for his wasted work on a quantum meruit basis. (He might also have been able to consider the abandoning of the whole series of books as an anticipatory breach, and pursued a claim that way).

7

3. AGREEMENT § The contract is abandoned or the terms are changed and both parties agree to this. § Both parties can provide consideration for a new contract or vary the old one. 4. BREACH

§ Breaches of a contract can occur where:

A) 1 party fails to perform

B) performance of the contract is defective

C) a lie is found in the contract

D) or, 1 party repudiates the contract, or obligations under it, without any lawful justification.

§ Remedies available are: i) Repudiation = ______________________

ii) Damages = ________________________

§ Breach of condition – can repudiate or claim damages (providing that this goes to the root of

the contract – Schuler v Wickman Machine Tool Sales) § Breach of warranty – only claim damages. § Breach of an innominate term – can repudiate or claim damages, as long as the effect of the

breach is sufficiently serious – Hansa Nord § Where there is a lie, it depends on when it occurred.

§ A lie before the contract = misrepresentation. o

§ A lie within a contract = breach.

8

2 TYPES OF BREACHES

1) Actual breach – the breach has already happened. 2) Anticipatory breach – the breach is about to happen. It occurs before the date for performance of the contract, and is accepted as a breach because one party gives notice to the other that he will not complete his obligations / or this is implied from his conduct. Hochster v De La Tour (1853) The claimant was hired to work as a courier two months after the contract date. One month later, the defendants wrote to him and cancelled the contract. He threatened legal action, but the defendants argued that he could not sue unless he could actually show that on the due date he was ready to perform. Held: The court would not accept this defence, and decided that there was no requirement that the victim of a breach of contract should be obliged to wait until the contract was in fact breached before being able to sue. As the breach was anticipatory, P could recover damages for the money he would have received had the contract been fulfilled. Frost v Knight (1872) D promised to marry his fiancée when his father died. Before his father died, he broke off the engagement with his fiancée. The fiancée sued successfully for the breach of promise – even though the father had not yet died and actual breach of contract had not yet taken place.

AO2

9

§ Originally, prior to the doctrine of frustration being developed, the law was applied very strictly and rigidly.

§ If a party failed to perform their contractual duties, they were held in breach of contract,

regardless of the reasons for this. Paradine v Jane (1647) J owed P rent money. However, J had not paid as he had been forced off the land by an army for three years. It was decided that J was still under a contractual duty and could not discharge the contract even though he could not use the land.

AO2

§ The doctrine of frustration was developed to prevent injustice in cases where one party

would be held responsible for the breach when in fact it was out of their control. § It occurs where a contract has been made, but for external reasons beyond the control of the

parties, the contract becomes impossible to perform (frustrated). § Both parties are released from their obligations (discharged) rather than one party being held

in breach. Taylor v Caldwell (1863) T hired a music hall from C but before it could be used, it burnt down. T sued C for money sent in preparation based on Paradine v Jane. The commercial purpose of the contract could not be performed because of reasons outside the control of both sides. The contract was held to be frustrated and both sides were released from their obligations, with neither party being responsible.

10

AO2

§ BUT - frustration has been limited to the following situations:

1. Impossibility – the intervening act makes the contract impossible to perform.

2. Illegality – the intervening act makes the contract illegal to perform.

3. Commercially sterilised – the intervening act makes the contract radically different and commercially worthless.

1. IMPOSSIBILITY § Performance becomes impossible to carry out: Davis Contractors Ltd v Fareham UDC(1956) Builders agreed to build houses at a cost of £92,450 within 8 months. As a result of a shortage of skilled labour, it took 22 months to complete at an additional cost of over £17,000. The builders claimed the contract was frustrated to claim the extra amount. The contract was not frustrated. The doctrine was only applicable if it was not the fault of either party and the contract was incapable of being performed. § Performance becomes impossible as the subject matter is destroyed: Taylor v Caldwell (1863) The music hall being destroyed meant the contract was frustrated.

11

§ Performance becomes impossible as the subject matter is unavailable: Jackson v Union Marine Insurance Co (1847) A ship ran aground and could not be loaded in a reasonable time. The court implied a term into the contract that the ship should be loaded within a reasonable time. As the ship was unavailable to be loaded within a reasonable time the contract was frustrated. § Performance becomes impossible as the service is unavailable due to illness: Robinson v Davidson (1871) D entered a contract for his wife to perform in a piano concert. She became ill and could not perform so was sued for breach of contract. She was not at fault here; it was her illness that made it impossible for her to perform so the contract was frustrated. § Performance becomes impossible as the party is unavailable: Condor v The Baron Knights (1966) A pop group entered a contract whereby they had to be available to perform seven nights a week. One of the group became ill and could not work this often. The contract was frustrated as one of the party, central to the contract, was unavailable. § Performance becomes impossible for other reasons: Morgan v Manser (1948) A music compere was contracted for a ten year period. However, for six years he was conscripted into the army for WWII, unable to perform the contract. The contract was frustrated as he was central to the contract but unavailable.

12

§ Performance becomes impossible if the delay is unreasonable: The Nema (1981) A contract was made for a ship for nine months with the expectation of 7 trips to be made in that time. However, because of strikes, only two trips could be made in that time. As the delays were unreasonable and the ship could not be used as expected, the contract became impossible to perform and was therefore frustrated. § Performance becomes impossible because of war: The Evia (1983); The Agathon (1983); The Wenjiang (1983). In all of these cases, the ships were left stranded because of the First Gulf War. As the contracts were impossible to perform they were said to be frustrated. Metropolitan Water Board v Dick Kerr (1918) Due to war breaking out, a contract for work being completed within six years became impossible as the government ordered the work to be stopped and took over some of the land.

AO2

13

2. ILLEGALITY

§ A contract is made but then becomes illegal: Denny, Mott & Dickson v James B Fraser & Co (1944) A contract was made for timber with a term that the buyer let the timber yard to the seller who had the option of buying it. It then became illegal to sell timber. The contract for the sale of timber was frustrated due to it becoming illegal. The rest of the contract – the letting of the yard with the option to buy – was also frustrated. § A contract is made but then because of war becomes illegal: Re Shipton Anderson & Harrison Bros (1915) Since the government requisitioned a cargo of grain during war time, the contract was frustrated.

AO2

3. COMMERCIALLY STERILISED § The commercial purpose of the contract disappears because of the intervening act. § ‘Frustration of the common venture’ / the essence of the bargain has been lost: Krell v Henry (1903) A contract was made to hire a room overlooking the procession for the coronation of King Edward VII (although there was no clear mention of the purpose of the agreement). As the King was ill, the coronation was delayed and D refused to pay for the room. The contract was frustrated as the foundation of the contract was to watch the procession which was cancelled outside of the control of the parties.

14

§ If some purpose can be found in the contract, then it may not be held to be frustrated: Herne Bay Steamboat v Hutton (1903) As part of King Edward VII’s coronation there was to be a review of a fleet of ships. D therefore hired a boat to see the review of the ships by the King and also to sail around and view the entire fleet himself. D claimed that as the coronation was delayed, the contract was frustrated. His claim of frustration failed as only one purpose of the contract was gone. The commercial value of the contract had not disappeared completely.

AO2

§ With the leasing of land, if the premises are destroyed, the contract is not frustrated as the

land itself is still available: Cricklewood Property & Investment Trust v Leighton’s Investment Trust (1945) A 99 year lease was taken out to build shops but before this was possible, WWII broke out. As a result of this, the government prevented such buildings from being put up. A claim was made that the contract had been frustrated. As the lease was for much longer than the War, it was decided that the contract had not been frustrated. The House of Lords then took the opportunity to review this decision in the following case:

15

National Carriers v Panalpina (1981) A 10 year lease was taken out on a warehouse. After five years the street where the warehouse was situated was closed by the council (for 18 months) and the tenant claimed the contract was frustrated. The contract was held to be frustrated by this intervening act. It would not make sense to decide that a lease with a clear purpose which could not be carried out should continue.

AO2

THE LIMITS OF FRUSTRATION

To apply the doctrine of frustration fairly, the courts have identified a number of situations in which it is NOT be possible to use it as a way of ending a contract. Frustration will not be allowed if:

a) It is self induced

b) The contract is simply more difficult to perform rather than impossible

c) It may have been a risk foreseen at the time of the contract

d) There are terms included by the parties to cater for the possibility of frustration

e) The contract ensures absolutely that it must be performed

16

A) FRUSTRATION IS SELF INDUCED

§ If one party causes the event that makes the contract impossible to perform then they will be responsible:

Maritime National Fish v Ocean Trawlers (1935) A fishing company with four trawlers hired another. When it applied for five licenses, it was only granted three, which it gave to its own trawlers. The company then claimed the contract for the hired trawler was frustrated as there was no licence for it. The fishing company had brought about this situation themselves. They were in control of the three licenses and chose not to use one for the hired trawler. The claim for frustration therefore failed.

AO2

B) IT IS SIMPLY MORE DIFFICULT TO PERFORM § An intervening act making the contract more difficult, but not impossible, will not discharge

the parties: Davis Contractors v Fareham UDC (1956) Builders could not find labour and material as low as the price tendered to win the contract. They claimed that the contract was frustrated. The court rejected this argument on the basis that inconvenience and financial hardship were not sufficient grounds to make the contract impossible to perform. It was simply more expensive. Tsakiroglou v Noblee Thorl (1962) A contract for a ship to deliver goods became more expensive and longer due to the closure of the Suez Canal. The contract was not frustrated as it was not impossible to perform.

17

Thames Valley Power v Total Gas (2005) Total Gas were unsuccessful in claiming their contract to supply gas was frustrated due to a rise in gas prices. It was merely a less lucrative contract for Total Gas – as they would lose approximately £9 million.

AO2

C) A RISK FORESEEN AT THE TIME § If the event that frustrates the contract was a risk foreseen at the time of the contract by both

parties, the contract cannot be discharged. Amalgamated Investment & Property Co v John Walker & Sons (1977) D made a contract to sell an old building to P for redevelopment, which it was suitable for at that time. However, unknown to both parties, the building became ‘listed’ and was therefore not suitable for redevelopment. The value of the building fell by £1.5 million and P tried to claim frustration. Frustration was unavailable as a means of discharging the contract as the risk of an old building being ‘listed’ was common. P should have investigated this possibility and have been more aware, being specialists.

AO2

18

D) TERMS INCLUDED TO CATER FOR FRUSTRATION § Terms that deal with what should happen if the contract becomes frustrated, with neither

party at fault, are called force majeure clauses. § These terms remove the ability to discharge the contract by way of frustration. The Fibrosa Case (1943) A contract was made for the sale of machinery to a Polish company. However, due to WWII, the delivery became impossible. The contract had a term referring to delays/inconvenience caused by war. The contract was still frustrated because the term only dealt with delay caused by war, not the problem of the impossibility of delivery. Jackson v Union Marine Ins (1874) A contract included the term ‘damages and accidents of navigation excepted’. The ship then ran aground. The term did not specifically cover this circumstance and therefore the contract was frustrated.

AO2

E) THE CONTRACT ENSURES ABSOLUTELY IT MUST BE PERFORMED

§ A frustrating event will not end the contract where it states it should be performed

regardless. Paradine v Jane (1647) As the parties did not mention any problems that may prevent the land from being used, the court decided there was an absolute undertaking that the contract be performed. Any event that may occur to prevent this was irrelevant.

19

THE EFFECTS OF FRUSTRATION

When a contract is frustrated, it raises the following problems: • The contract ends at the point of the frustrating event

• The parties are released from their obligations from that point forward

• The parties are bound by any actions before the frustrating event

Chandler v Webster (1904) A room was hired for the procession of the King and paid for in advance. It was accepted that the delay of the procession frustrated the contract but the parties obligations ended there. The money already paid for the room could not be recovered. The Fibrosa Case (1943) The £1000 paid in advance for machinery could be recovered when the contract became frustrated. However any work done in making the machines could not be recovered.

AO2

LAW REFORM (FRUSTRATED CONTRACTS) ACT 1943

§ As a result of the harshness created by frustration, when nothing is recoverable, the Law

Reform (Frustrated Contracts) Act was passed in 1943. § It deals with what should happen when a contract becomes frustrated. § The 1943 Act provides parties to a frustrated contract with the following rights:

20

S 1(2) Recover money paid in advance of the contract - Even where there is no consideration, if money is paid in advance it must be returned. S 1(2) Money due is no longer due S 1(2) Recover money for work already done under the contract - The court has discretion over whether to award money for work already carried out. This will only be a fair amount and not necessarily the actual cost of the work. Gamerco SA v ICM/Fair Warning Agency (1995) P, Spanish pop concert promoters, entered into a contract with D whereby the group Guns 'n Roses would perform at a stadium in Madrid on July 4 1992. On June 30 engineers found structural defects in the stadium. On July 1 the Spanish authorities banned the use of the stadium and revoked the permit to hold the event. P had paid D $412,500. Both P and D had incurred expenses in preparation for the event. P sued under section 1(2) to recover the advance payment. Held that the contract was frustrated because the stadium was unsafe and its use banned. P was entitled to recover the advance pay but discretion was used by the courts to award damages of $412,500 when in actual fact the amount lost was $450,000. S 1(3) Money must be paid where one party has gained a valuable benefit - The court has discretion as to whether it awards money to be paid where one party has gained a valuable benefit because the contract has been partially performed. BP Exploration v Hunt (1979) H was granted a concession to explore and drill for oil in Libya. When H found oil he started drilling but was then stopped by the Libyan Government. The contract between BP and H was frustrated. BP only recovered a small amount of its costs so sued H under S 1(3) of the 1943 Act claiming he had gained a valuable benefit from the oil already drilled and compensation from the Libyan Government. Since BP had already recovered $62 million of its $87 million outlay, H had to pay the remaining amount of $35 million as this did not exceed the benefit he had attained.

21

AO2

PROBLEMS WITH THE LAW REFORM (FRUSTRATED CONTRACT) ACT 1943

The Act does not apply to: § The carriage of goods by sea, except charters. § Insurance contracts. § Perishing goods. § Contracts that already have terms to decide what happens where there is a frustrating event.