Discharge of the Contract
A contract can be discharged by:
- Performance
- Agreement
- Breach
- Frustration
Performance
Where both parties perform exactly and precisely the full extent of their obligations, the contract will be discharged by performance and the parties will be freed of their obligations. Where there has been partial performance, there can be no payment except where:
- There has been substantial performance (Ruxley Electronics)
- Where partial performance has been accepted
It may be possible to infer from circumstances that the other party is happy to accept partial performance and the benefits it bestows on him, and that he will pay proportionately for it – but he must have a genuine choice whether to accept the partial performance (Sumpter v Hedges).
- Where one party prevents complete performance by the other
The partial performer may either sue for damages for the other’s breach or recover on the basis of Quantum meruit where the other party prevents complete performance.
- Where the contract is divisible, and some parts have been completed (e.g. 12 tons of coal to be provided in 12 monthly instalments of 1 ton each – there may be an obligation to pay in respect of coal already delivered).
Agreement
A contract may be discharged by agreement when both parties agree to bring the contract to an end and release each other from their con- tractual obligations.
For a contract to be discharged through agreement, there must be:
- Agreement (Accord)
Each party must agree to end the contract. The agreement must be freely given.
- Valid consideration (Satisfaction)
If both parties have still to perform at least some of their obligations, then consideration will be simply each of them giving up their rights under the contract. Where one party has performed their contractual obligations but the other has not, the non-performing party must pro- vide fresh consideration to make the agreement binding. If the agreement is made by deed, there is no requirement to provide considera- tion.
Breach
All breaches of contract, however small, entitle the injured party to sue for damages. In two situations, the breach may be one which permits discharge of the contract:
- Repudiation of the contract
Repudiation may be express or implied, arising from words or conduct which indicate that one party is not going to perform the obliga- tions under the contract. Where a party indicates their intention not to perform their contractual obligations, the innocent party is not obliged to wait for the breach to actually occur before they bring their action for breach (Hochster v De la Tour). The claimant can either sue immediately or continue with the contract and wait for the breach to occur before bringing their action.
- Cases where the breach is of a major or fundamental nature
Where one party is in breach of a major term (condition) of the contract, or in breach of an innominate term where the effects are serious, the innocent party can treat such behaviour as entitling him to treat the contract as discharged. Where a minor term (warranty) is breached, the injured party is limited to damages. Where time is of the essence in contracts (expressly stipulated, circumstances, or notice after unrea- sonable delay) – breach of such a term will give rise to a right to treat the contract as repudiated.
Where the injured party has the right to treat the contract as discharged, he can elect to affirm the contract and go ahead with performance despite the breach, or accept the breach and consider himself discharged. Termination for breach is different to rescission in that it operates prospectively, i.e. it releases both parties from their future obligations, but leaves intact rights which have accrued prior to the termination of the contract, e.g. secondary obligations to pay damages for losses caused (Photo Production v Securicor Transport).
Frustration
A contract may be frustrated where an unforeseen external event occurs after the contract was made, which is not the fault of either of the parties, and which renders performance of the contract impossible, illegal or something radically different from that which the parties con- templated when they entered into the agreement.
A contract will not be frustrated where:
- There is a force majeure clause;
The presence of a force majeure clause does not have the automatic effect of excluding the doctrine of frustration. It is always a question of construction whether a contract term was intended to actually cover the event which occurred (Metropolitan Water Board v Dick Kerr).
- The event was self-induced, i.e. not outside the control of either of the parties and they exercised some control or choice over it (Super Servant);
- The impossibility of performance is the fault of either of the parties, e.g. negligence (Maritime National Fish v Ocean Trawl- ers).
What happens when a contract is frustrated?
Where a contract is found to be frustrated, the contract is automatically discharged at the moment of the frustrating event – there is no choice for the parties as in breach. Neither party may sue for breach of contract.
The allocation of loss is decided by the Law Reform (Frustrated Contracts) Act 1943. This provides:
s.1(2) – All money payable under the contract ceases to be payable and any money already paid may be recovered. However, where ex- penses have been incurred by the party to whom those sums were paid or payable the court may allow that party to recover those expenses provided that they do not exceed the amounts paid or payable.s.1(3) – Where any party has obtained a valuable benefit, the court has a discretion to award a sum which is just in all the circumstances of the case, not exceeding the value of the valuable benefit.
