Legal Environment

Contract 10 Discharge of Contracts

Discharge of Contracts
Now that we know how to create a contract, we need to look at how a contract comes to an end Discharge of a contract means that the parties are released from their obligations in the contract

ie they no longer have to do what they agreed

Discharge of Contracts (cont.)

A contract can be discharged in 4 ways Performance Agreement Frustration Breach

Discharge by Performance
As you might expect, once the parties have done what they promised to do then the contract is discharged The parties no longer have any obligations left Performance is the most common way that a contract is discharged
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Discharge by Performance (cont.)

For example, a man entered into a contract to work on a boat which was making a journey to the UK He was to be paid when the boat arrived in the UK Unfortunately, he died before the boat arrived The court held that his widow could not collect his money because he did not complete the contract

Discharge by Performance (cont.)

Usually, the parties have to perform all of their obligations in the exact way stated in the contract However, there are 4 exceptions to this
Where the contract is divisible Where the contract can be completed by substantial performance Where performance has been prevented by the other party Where partial performance has been accepted by the other party

The contract is divisible

A court may decide that parts of the contract are separate from other parts Eg 1: Employees are usually paid each month. Therefore, in our previous example, if the worker on the boat was paid monthly, his widow could have claimed the money for the months before he died.

The contract is divisible (cont.)

Eg 2: John makes a contract with Jane to carry out improvements to her home. He installs new heaters and a new bath. If the heaters are defective but the bath is ok, then Jane can refuse to pay for the heaters but she must pay for the bath.

Substantial Performance
A contract may be discharged by substantial performance of what was agreed In other words, the most important part is completed and only a small part is has not been done (or a small part needs to be fixed) For example, John has a contract with Jane to decorate her house for 750 by painting it and making some furniture.
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Performance Prevented
If one party prevents the other from performing their obligations under the contract then the contract is discharged If some work has been done before this, then the party may claim payment for the work which has been done

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Performance Prevented (cont.)

Eg: John has a contract with Jane to paint her house. He starts the work, but after two days, Jane asks him not to come back because her pet cat is scared of him John can claim payment from Jane for the two days work which he has done
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Partial Performance Accepted

The contract can be discharged if one party accepts partial performance by the other party Eg: Jim places an order with Fred for 12 bottle of wine. However, Fred can only supply 10 bottles. Jim could refuse to accept the 10 bottles However, he could accept 10 bottles and reduce the price he pays That would be accepting partial performance by Fred

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Discharge by Agreement
A contract is an agreement Therefore, the parties can make a new agreement to end the contract The contract itself may contain a clause which states that the contract will end at a certain time

Eg lease

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Discharge by Agreement (cont.)

Or the contract may allow the parties to end the contract on giving notice to the other party

Eg 1 months notice in contracts of employment

If there is no clause in the contract then another contract is needed to end the first contract
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Discharge by Agreement (cont.)

Where the contract is executory (ie a promise for a promise) then it is enough consideration if each party promises to release the other Where the contract is executed (ie where one party has performed all or part of their obligations) then the necessary consideration is a new contract
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Discharge by Frustration
If, from the very beginning, it is impossible to carry out what has been agreed then the contract is void Frustration applies where it becomes impossible to perform the contract after it has been made This discharges the contract
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Discharge by Frustration (cont.)

Frustration applies in the following situations:
Destruction of the subject matter of the contract Government interference or illegality An event does not take place The commercial reason for the contract is defeated Death or incapacity of a party in a contract of personal service

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Destruction of the subject

If the subject matter of the contract is destroyed after the contract is made then the contract is discharged For example, a contract was made for a concert. After the contract was made the building where the concert was to be held burned down. The court held that the contract was frustrated
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Government Interference/Illegality
After the contract has been made, the government may take some action which frustrates the contract Or the law may change and the contract becomes illegal Eg 1: Before WW2, many UK companies had contracts with German companies. Once the war started, it was illegal to contract with German companies so the contracts were frustrated
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Government Interference/Illegality
Eg 2: During the war, the government sometimes took buildings owned by companies so that they could be used to help with the war. If these buildings were in contracts between the owners and other businesses then those contracts would be frustrated

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An event does not take place

Where a contract is made only because of some event which will take place, but then the event does not take place, then the contract is frustrated EG: a man rented a room so that he could watch the procession which was part of King Edward VII becoming the king of Britain
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An event does not take place (cont.)

However, the procession did not take place because Edward was ill Because the man only rented the room to see the procession, the contract was frustrated However, if he had rented the room for a week for a holiday and watching the procession was just part of the holiday, then the contract would not have been discharged by frustration 22

Commercial Purpose Defeated

Two parties may enter into a contract, but then the circumstance change so much that to make them carry out their obligations would mean that they have to do something very different from what they intended In other words, the commercial reason for making the contract has gone or changed too much
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Commercial Purpose Defeated (cont.)

Eg: A company hired a boat to take some metal to America. On the way to get the metal (before going to America) the boat ran aground It took one month to get the boat in the water again, and could not be repaired completely for a long time Because of this the company hired another boat
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Commercial Purpose Defeated (cont.)

The owner of the boat had taken out insurance in case he was unable to deliver the metal to America He claimed against the insurance company The insurance company refused to pay him They said he should sue the company for breaching its contract with him by hiring another boat
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Commercial Purpose Defeated (cont.)

The court decided that the long delay in refloating and repairing the boat ended the commercial reason for the contract As a result, the company had been released from its obligations under the contract Therefore, it was allowed to hire another boat.
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Contract of personal service

Where a contract is made with a person because of that persons skill or knowledge, then if the person dies or becomes incapacitate, then the contract is frustrated Eg: a musician who is hurt in an accident and cannot play

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When frustration does not apply

The courts are unwilling to apply frustration because many parties would try to use it simply to avoid an unprofitable situation Therefore, there are certain situations where frustration does not apply 1. If the problem is covered in a clause in the contract, then the clause must be followed
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When frustration does not apply

For example, a contract for tickets for a concert might say that the tickets are valid for the day of the concert and if it is cancelled then 80% of the ticket will be repaid 2. If one of the parties creates the event which causes frustration then frustration does not apply
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When frustration does not apply

For example, two companies had a contract for fishing. The type of fishing required a licence Company A applied for enough licences for both companies (5 licences) However, they only got 3 and kept those for themselves This meant that Company B could not perform its part of the contract
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When frustration does not apply

The court held that Company A had caused the frustration by keeping all the licences In fact, Company A had breached the contract 3. If the contract can still be performed in another way, then frustration does not apply
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When frustration does not apply

For example, if the main delivery route is blocked, but there is another route which can be used A party cannot try to use frustration simply because the contract becomes more expensive to perform Eg: a builder entered into a contract to build 78 houses in 8 months for 94,000 However, it took 22 months and 122,000 to build the houses
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4.

The Effect of Frustration

Under the Law Reform (Frustrated Contracts) Act 1943 Any money paid can be recovered Any money due is no longer payable The parties can recover their expenses A party must pay the other for any benefit received before frustration discharge the contract
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Force Majeure Clauses

In practice, many events which can cause frustration are dealt with in contract in clauses know as force majeure clauses These usually say that things like strikes, war, epidemics, government restrictions etc will allow the parties to suspend or cancel the contract This is to avoid the time and expense of having to go to court
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Discharge by Breach
A breach of contract occurs where one party does not carry out his obligations, or fails to carry them out properly However, not all breaches lead to a discharge of the contract In order for a discharge to occur, one party must say that he will not perform his obligations before he is due to perform them or before he has finished performing them
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Discharge by Breach (cont.)

Discharge also occurs where one party commits a serious breach You will remember from an earlier class that breach of a condition in a contract is a serious breach, whereas breach of a warranty is not A breach can also be said to be serious if serious consequences result from that breach
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Anticipatory Breach
Anticipatory breach is where one party indicates that he will not perform his obligations before the time he is due to perform them This intention not to fulfill the obligations may be express or implied Express anticipatory breach is where the party actually states that they will not perform
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Anticipatory Breach (cont.)

Implied anticipatory breach is where a party does something which makes performance impossible For example, John agrees to sell his car to Fred next Friday. However, on Monday, he sells his car to Jim

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Remedies for Breach of Contract

Where one party breaches a contract then the other party may Claim damages Claim payment for quantum meruit Raise a court action for specific performance Raise a court action for an injunction Raise an action for the agreed contract price Repudiate the contract
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Remedies (cont.)
The remedy which is available depends on whether the breach is a breach of a condition or breach of a warranty

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Damages
Damages can include compensation for financial loss, personal injury or damage to property However, the amount of damages paid is only to compensate the party for loss Damages are not intended as a punishment

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Damages (cont.)
A court will only award damages for losses which arise naturally from the breach Losses which are too remote from the breach will not be covered EG: Company A makes a contract with Company B to buy a machine. Company B delays in delivering the machine Company A sues Company B for the loss of profit which they could have made if the machine had been delivered on time
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Damages (cont.)
Company A also claims damages for a very profitable contract with Company X which it was unable to make because it did not have the machine The court will award damages for the loss of the normal profit of Company A (ie their first claim) However, the damages in respect of the contract with Company X are too remote
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Damages (cont.)
It is reasonable to expect that Company B would realise that delaying the delivery of the machine could cause a loss of normal profit for Company A However, it is not reasonable to expect Company B to know about the possible contract between Company A and Company X
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Damages (cont.)
The party who suffers loss due to the breach of contract must try to mitigate their loss That is, they must take steps to try to reduce their loss, or to stop it increasing Eg: If the buyer refuses to accept the sellers goods, the seller can claim damages but he must also try to sell his good to another party and get the best price for them
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Quantum Meruit
Quantum meruit means that a party should be paid as much as he has earned or deserved EG: A company makes a contract with an author to write a book. Payment is to be made when the book is finished. However, the company decides not to publish the book before the author has finished writing it
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Quantum Meruit (cont.)

Under quantum meruit, the author could claim payment for the research and writing which he had done before the book was cancelled

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Specific Performance
Specific Performance is where the court makes the party who is in breach of contract carry out their obligations Usually, this is only done where damages is not a sufficient remedy

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Injunction
This is the opposite of specific performance It is where a court orders one party not to break the contract It is often used to prevent people from breaking contracts of personal service Eg: an actress was prevented from travelling to England because she would be unable to work for the American movie company which she had a contract with
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Action for the Agreed Price

In some situations, a party may sue for payment of the price agreed in the contract rather than for damages This is the case with the Sale of Goods Act 1979

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Repudiation
Repudiation means that the party who is not in breach does not have to perform his obligations where the other party breaches a condition of the contract

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Summary
Discharge of a contract means that the parties are released from their obligations in the contract

ie they no longer have to do what they agreed

A contract can be discharged in 4 ways

Performance Agreement Frustration Breach

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Summary (cont.)
Where one party breaches a contract then the other party may Claim damages Claim payment for quantum meruit Raise a court action for specific performance Raise a court action for an injunction Raise an action for the agreed contract price Repudiate the contract
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