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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
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
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 6 .Discharge by Performance (cont.) Usually.
Therefore. his widow could have claimed the money for the months before he died. if the worker on the boat was paid monthly.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. 7 . in our previous example.
) Eg 2: John makes a contract with Jane to carry out improvements to her home. then Jane can refuse to pay for the heaters but she must pay for the bath. 8 . If the heaters are defective but the bath is ok.The contract is divisible (cont. He installs new heaters and a new bath.
9 . 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.Substantial Performance A contract may be discharged by substantial performance of what was agreed In other words.
then the party may claim payment for the work which has been done 10 .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.
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 11 . He starts the work.Performance Prevented (cont.) Eg: John has a contract with Jane to paint her house.
Fred can only supply 10 bottles.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. Jim could refuse to accept the 10 bottles However. However. he could accept 10 bottles and reduce the price he pays That would be accepting partial performance by Fred 12 .
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 13 .Discharge by Agreement A contract is an agreement Therefore.
) Or the contract may allow the parties to end the contract on giving notice to the other party Eg 1 month’s notice in contracts of employment If there is no clause in the contract then another contract is needed to end the first contract 14 .Discharge by Agreement (cont.
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 15 .
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 16 .
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 17 .
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. The court held that the contract was frustrated 18 . After the contract was made the building where the concert was to be held burned down. a contract was made for a concert.
many UK companies had contracts with German companies. Once the war started. the government may take some action which frustrates the contract Or the law may change and the contract becomes illegal Eg 1: Before WW2. it was illegal to contract with German companies so the contracts were frustrated 19 .Government Interference/Illegality After the contract has been made.
the government sometimes took buildings owned by companies so that they could be used to help with the war.Government Interference/Illegality Eg 2: During the war. If these buildings were in contracts between the owners and other businesses then those contracts would be frustrated 20 .
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 21 . but then the event does not take place.An event does not take place Where a contract is made only because of some event which will take place.
if he had rented the room for a week for a holiday and watching the procession was just part of the holiday.) However. the contract was frustrated However. the procession did not take place because Edward was ill Because the man only rented the room to see the procession. then the contract would not have been discharged by frustration 22 .An event does not take place (cont.
the commercial reason for making the contract has gone or changed too much 23 .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.
and could not be repaired completely for a long time Because of this the company hired another boat 24 .) Eg: A company hired a boat to take some metal to America.Commercial Purpose Defeated (cont. 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.
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 25 .
Commercial Purpose Defeated (cont. it was allowed to hire another boat.) 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. 26 .
then if the person dies or becomes incapacitate.Contract of personal service Where a contract is made with a person because of that person’s skill or knowledge. then the contract is frustrated Eg: a musician who is hurt in an accident and cannot play 27 .
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. then the clause must be followed 28 . If the problem is covered in a clause in the contract.
If one of the parties creates the event which causes frustration then frustration does not apply 29 .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.
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 30 .When frustration does not apply For example.
If the contract can still be performed in another way.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. then frustration does not apply 31 .
if the main delivery route is blocked.000 to build the houses 32 4. 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.When frustration does not apply For example.000 However. it took 22 months and £122. .
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 33 .
war.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. 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 34 . epidemics.
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 35 .Discharge by Breach A breach of contract occurs where one party does not carry out his obligations.
Discharge by Breach (cont. whereas breach of a warranty is not A breach can also be said to be serious if serious consequences result from that breach 36 .) 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.
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 37 .
on Monday. John agrees to sell his car to Fred next Friday. However.) Implied anticipatory breach is where a party does something which makes performance impossible For example. he sells his car to Jim 38 .Anticipatory Breach (cont.
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 39 .
) The remedy which is available depends on whether the breach is a breach of a condition or breach of a warranty 40 .Remedies (cont.
the amount of damages paid is only to compensate the party for loss Damages are not intended as a punishment 41 .Damages Damages can include compensation for financial loss. personal injury or damage to property However.
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 42 .) 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.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 43 .Damages (cont.
Damages (cont. it is not reasonable to expect Company B to know about the possible contract between Company A and Company X 44 .) 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.
Damages (cont. or to stop it increasing Eg: If the buyer refuses to accept the seller’s goods.) 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. the seller can claim damages but he must also try to sell his good to another party and get the best price for them 45 .
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. the company decides not to publish the book before the author has finished writing it 46 . However.
) Under quantum meruit.Quantum Meruit (cont. the author could claim payment for the research and writing which he had done before the book was cancelled 47 .
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 48 .
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 49 .
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 50 .
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 51 .
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 52 .
) 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 53 .Summary (cont.