LEGL1001 Foundations of Law

Week 9
The law of contract (5) The end of the contract (discharge)
and Remedies (CACL4 Chapters 11 & 12)
Before we consider how contracts come to an end, it is important to pay some attention
to how contracts operate and what the rights and liabilities are under them. One of
the important doctrines associated with how contracts operate is the doctrine of
privity of contract. What this doctrine means is that a contract cannot confer rights
or impose obligations on any person except the parties to the contract.

The basic principle, then, is that “a person not a party to a contract may not himself
sue upon it so as directly to enforce its obligations”: Coulls v Bagot’s Executor and
Trustee Co (1967). So,

If A agrees with B to do something for the benefit of X, X cannot sue A if A fails to fulfil
his promise.

Exceptions to the privity of contract doctrine:

• Where a contracting party entered a contract as an AGENT for another party:

Port Jackson Stevedoring v Salmond & Spraggon (1980)
• If there is a trust arrangement.
• Privity of contract does not apply to contracts of insurance: Trident General
Insurance v McNiece Bros Pty Ltd (1988)
T entered into a contract of insurance with B Ltd, to provide cover against
liability in respect of alterations being carried out at B’s lime crushing plant. The
public liability policy was expressed as extending not only to B Ltd and all its
related companies, but to contractors, subcontractors and suppliers. M Ltd, the
principal contractor at the plant, was held liable for inuries to a crane driver
employed by one of its sub-contractors. M Ltd sought an indemnity under the
insurance policy between T and B Ltd. T refused the claim on the ground that
M Ltd was not a party to the contract.

Majority of the High Court held that T was bound to indemnify M Ltd under the
insurance policy with B Ltd.

Discharge of contract

A contract may be brought to an end in a number of ways:

1. Performance ie fulfilment of its provisions

2. Agreement between the parties

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 3. Breach - where one party fails to fulfil his or her obligations under the contract
4. Frustration – where some supervening event prevents further performance of
the contract
5. By operation of law

1. Discharge by Performance
When the parties to the contract fulfil their obligations to one another, the
contract comes to an end (is discharged or terminated) by performance.
Complete performance in strict accord with the terms of the contract is
necessary, otherwise a breach of contract results.

NB Entire contract and divisible contracts

What is an Entire Contract?

A contract that makes it clear from its terms that the whole contract must be
performed before any payment will be due

– Example:
• Sumpter v Hedges [1898] 1 QB 673 (CACL4 p 223)

EXCEPTIONS TO COMPLETE PERFORMANCE

What is a divisible contract? (CACL4 p 221)

• A contract where it was the intention of the parties that

consideration (payment) be appropriated on a pro rata basis to
severable parts of the services or goods to be supplied
• An example is a contract for the sale of goods by instalments. The
seller may seek payment on the delivery of each instalment and
does not have to wait until all instalments have been delivered to
demand payment.

Substantial performance

• Hoenig v Isaacs [1952] 2 All ER 176 (CACL4 p 222)

2. Discharge by Agreement (CACL4 p 224)

Termination under the original agreement
A contract may be terminated through the happening of an event which is
provided for in the agreement itself. For example, provision of termination of
loan agreement on default by the borrower, or termination of a contract of lease
may be specified on the expiry of a specified number of years.

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 Where a contract does not contain a provision as to its duration, a court may
imply a right to terminate on giving reasonable notice to the other party:
Crawford Fitting v Sydney Valve & Fitting (1988). (CACL4 p 224)

Termination by subsequent agreement

A contract can be terminated by means of a further agreement, but the
subsequent agreement must be valid to modify the earlier contract. A
subsequent agreement may cancel the original contract or vary the terms of the
original contract.

Where both parties agree to cancel the original contract this is a mutual
discharge, BUT there must still be something to be done by each party under
the original contract or there is no consideration.

If one party has completed their obligations and the other has not, the only way
of cancelling the contract is by an agreement under seal to release the
defaulting party OR by giving further consideration for the release of the party
still under an obligation (this process is often called accord and satisfaction).

A new agreement may be made providing for an alteration of the terms of the
original contract so that a new contract is substituted for the old (a substituted
agreement).

Terms – condition precedent, condition subsequent

The parties to a contract may make the performance of their contract conditional upon
the occurrence of a specified event or conditional on an event not occurring. These
are called a condition precedent or a condition subsequent

Condition precedent

A distinction must be made between

(a) A condition precedent to the FORMATION or existence of contract and

(b) A condition precedent to the PERFORMANCE of obligations under a contract.

Generally, the court will tend to favour a construction leading to the conclusion that a
particular stipulation is a condition precedent to PERFORMANCE of contract: Perri v
Coolangatta Investments (1982).

Condition subsequent

A condition subsequent is a condition contained in a contract upon the happening of

which at a subsequent time, the contract will be terminated. In this case, the parties’
obligations to perform the contract is immediately binding but will come to an end
should the event specified in the condition occur. For example, in a charterparty an
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owner of a ship agreed to make a voyage on certain terms, “acts of God, dangers of
the seas etc” excepted. If one of the excepted risks occurs, the owner is relieved of
further performance: Geipel v Smith (1872).

3. Discharge by Breach

We now consider when a breach of contract by one party may entitle the other party
to terminate the contract. Not all breaches will entitle the innocent party to end the
contract, some may only entitle the innocent party to sue for damages.

An innocent party has the right to terminate the contract where the other party
repudiates their obligations under the contract, ie where they demonstrate an
absence of willingness or ability to perform their obligations under the contract.
Repudiation is determined by an objective test. It is concerned with the conduct of the
repudiating party, not their subjective state of mind.

Where a contract is entirely unperformed on both sides, eg, where the time for
performance has not yet arrived and one party repudiates the contract, the other can
treat the contract as terminated and sue immediately for damages. This is known as
anticipatory breach of contract.

Repudiation gives the other party to the contract an option, either, to ignore the breach
and insist upon performance when it is due, or to accept the repudiation and treat
themselves as discharged from any further obligation under the contract.

A breach in actual performance by one party entitles the other party to terminate the
contract if either

(i) If the acts or omissions by the defaulting party are such that they show an
intention to repudiate the whole contract OR
(ii) If there has been a breach of an ESSENTIAL or fundamental obligation.

“Whether a term of a contract is essential or not is a question of construction

which is to be answered with due regard to the general nature of the contract
considered as a whole and to its particular terms See Tramways Advertising
v Luna Park (1938), where Jordan CJ said: “The test of essentiality is
whether it appears from the general nature of the contract considered as a
whole, or from some particular term or terms, that the promise is of such
importance to the promisee that he would not have entered into the contract
unless he had been assured of a strict or substantial performance of the
promise, that that this ought to have been apparent to the promisor”: DTR
Nominees v Mona Homes (1978).

Conditions, Warranties, innominate (intermediate) terms

A condition is a term of a contract that is of such basic importance that breach of it

gives rise to a right to treat the contract as at an end.

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A warranty is a lesser term and breach of warranty merely gives rise to a right to sue
for damages.

The court will determine whether a term is a condition or warranty if the parties have
not expressed this in the contract.

In commercial contracts, the general rule is that stipulations as to time, except as to

time of payment, are essential conditions.

If a term of a contract stands between a condition and warranty, it is known as an

innominate or intermediate term. It will operate as a condition or warranty
depending on the gravity/seriousness of the breach. If the breach is trivial and
damages are an adequate remedy, then it will operate as a warranty. However, if the
breach is serious, it may operate as a condition.

For example, seaworthiness clause in a contract: Hong Kong Fir Shipping v Kawasaki
(1962). See also Ankar v National Westminster Finance (1987) (CACL4 p 230)

4. Discharge by Frustration (CACL4 pp 232 ff)

After a contract has been made, some unforeseen event may occur which results in
such a fundamentally different situation from that contemplated by the parties at the
time of entering into the contract that the law regards them as being discharged from
any further obligation under the contract. The contract is said to have been
“frustrated”. For the unforeseen event to have this effect, it must have been of such
a serious nature as to make further performance of the contract impossible, illegal or
radically different from that contemplated by the parties. Mere hardship,
inconvenience or material loss will not of themselves amount to frustration.

Examples:

• Subsequent change in the law may render further performance of the contract
illegal and the contract may be terminated: Ertel Bieber v Rio Tinto (1918)
(CACL4 p 233)
• Where the contract is one of personal service and the party to perform the
service dies or suffers a serious disability, the contract will be terminated:
Robinson v Davidson (CACL4 p 233)
• Destruction of the subject matter of the contract – contract for hire of a concert
venue terminated when the building burnt down: Taylor v Caldwell (1863)
(CACL4 p 234)
• Objective no longer attainable – hire of flat to view Coronation procession,
coronation postponed because Edward VII was ill – contract frustration by
cancellation of coronation procession: Krell v Henry (1903) (CACL4 pp 234-5)
• Government intervention, eg, in wartime: Metropolitan Water Board v Dick, Kerr
and Co (1918) (CACL4 p 235)

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• Other circumstances making the performance RADICALLY different: Codelfa
Constructions v SRA NSW (1982) (CACL4 p 236)
Codelfa contracted to excavate tunnels and do concreting work associated with
a railway. Various stages of the work were to be completed on particular dates.
The whole job was to be completed within 130 weeks. Time was made of the
essence of the contract. The work caused a lot of noise and vibration. A
resident obtained an injunction to stop Codelfa from working between 10 pm
and 6 am. Codelfa argued that the changed working conditions amounted to
frustration. It was found that the work could not be completed unless Codelfa
ran 3 shifts per day and that neither party had contemplated restrictions in
working hours because of an injunction.
A majority of the High Court held that performance of the contract had become
a thing radically or fundamentally different from that agreed between the parties
and that the contract had been frustrated.

When a contract has been frustrated, the whole contract is automatically

terminated. A frustrated contract is not void ab initio, it is terminated by the
supervening event and future obligations of the parties are discharged.

In NSW, the Frustrated Contracts Act 1978 (NSW) adjusts the rights of parties
to a frustrated contract. It provides for
(a) The repayment of money paid before frustration
(b) Payment for any benefit which a party has obtained from what another party
has done under the contract; and
(c) Payment of half of the reasonable costs incurred by a party for the purpose
of performance of the contract.
Statute does not apply to contracts of insurance, carriage of goods by sea,
or where the parties have excluded the operation of the Act.

5. Discharge by Operation of law

A contract may end independently of the wishes of the parties.

Bankruptcy
If a party liable under a contract becomes bankrupt they are personally relieved
of the contract. The Bankruptcy Act 1966 (Cth) gives powers to the Trustee in
Bankruptcy to adopt or rescind certain contracts.

Merger
A deed may in certain cases displace a simple contract (which is then
terminated). The simple contract becomes merged in, and is extinguished by
the deed. For this to happen, the parties to the two agreements must be the
same, the subject matter must be the same, and the second security must be
higher than the first.

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Page 7 of 12
Remedies (CACL4 chapter 12)
We will now consider the remedies available where the contract is not performed in
the way agreed between the parties. An award of damages, ie monetary
compensation is the basic common law remedy for a breach of contract. In certain
circumstances, the equitable remedies of specific performance and injunction may
be available. We will also consider the remedy of restitution.

The remedies available to an innocent party on breach by the other party depend on
the nature of the breach. If there has been a serious breach of contract, such as a
breach of condition, the innocent party may elect to terminate the contract. If the
innocent party does elect to terminate, then the contract comes to an end and the
parties are released from further performance under the contract. In this case, the
innocent party can ALSO sue for damages for losses they have suffered in
consequence of the breach.

If the breach is less serious, or the innocent party has elected NOT to terminate,
the innocent party is entitled to sue for damages for the breach of contract. The aim
of awarding damages for breach of contract is to compensate the innocent party for
the loss resulting from the breach.

DAMAGES

The general principle in awarding damages is that damages for breach of contract
are awarded to place the innocent party, as far as money can do so, in the same
position as he/she would be in if the contract had been performed.

In Commonwealth v Amann Aviation (1991) (CACL4 p 246), the High Court held

1. In most cases the plaintiff is compensated for the loss of benefits (usually loss
of profits) that it expected to receive in exchange for its own promise
(expectation damages). The onus is on the plaintiff to prove this loss.
2. Where it is not possible for a plaintiff to demonstrate whether, or to what extent,
the performance of a contract would have resulted in a profit, the plaintiff can
seek to recover the expenses (ie wasted expenditure) he/she reasonably
incurred in reliance on the defendant’s promise to perform its obligations under
the contract (reliance damages).
3. If a plaintiff’s expenditure would not have been fully recovered if the contract
had been performed, the plaintiff is entitled to damages only for an amount
equivalent to that which would have been earned if the contract had been
performed. Onus of proving plaintiff’s expenditure would not have been
recouped even if the contract had been performed is on defendant.

DAMAGE MUST NOT BE TOO REMOTE

Sometimes the consequences flowing from a breach of contract might be
completely unexpected or unforeseen. The common law has developed the

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principle that damages recoverable are limited to those which are not too
remote. In order to be compensable, the loss suffered must have been within
the reasonable contemplation of the parties as likely to result from the breach
of contract.

The party who is in breach of contract is liable in damages to the other

contracting party for:
(i) Loss arising naturally from the breach ie loss occurring in the usual or
normal course of things from the breach of contract, OR
(ii) Loss which is actually contemplated as a probable result of the breach,
ie, loss occurring as a result of special or exceptional circumstnaces
where such were made known to the party in breach so that he/she could
have reasonably contemplated the likelihood of exceptional loss if the
contract was broken: Hadley v Baxendale (1854) (CACL4 pp 248-9)

“The crucial question is whether, on the information available to the

defendant when the contract was made, he should, or the reasonable
man in his position would, have realised that such loss was sufficiently
likely to result from the breach of contract to make it proper to hold that
the loss flowed naturally from the breach or that loss of that kind should
have been within his contemplation”: Koufos v Czarnikow (1969)
Example – pignuts case - H Parsons (Livestock) v Uttley, Ingham &
Co (1978) (CACL4 p 250)

DUTY TO MITIGATE LOSS

The law imposes a duty on a person claiming damages to take all

reasonable steps to mitigate, ie minimise, the loss caused by the breach
of contract. A person who fails to mitigate cannot recover any part of the
loss that is attributable to his/her failure to do so. A person suing for
damages for breach of contract is only required to act reasonably in
mitigating their loss and is not required to take undue steps, expose
themselves to risk, or spend money which they cannot afford simply to
reduce the amount of their loss.

Damages are not usually recoverable for disappointment or distress,

except where there is a breach of an express or implied term that the
promisor will supply the promisee with pleasure, enjoyment or personal
protection: Baltic Shipping Co v Dillon (1993) (CACL4 p 254)

The damages we have been considering here are known as ordinary,

actual or compensatory damages for breach. These are to be
contrasted with nominal and exemplary damages. Nominal damages
are a token sum awarded where there has been a breach but the plaintiff

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 cannot show any actual loss. Exemplary damages are not
compensatory, but are awarded to punish the party in default because
of the intentional or flagrant nature of the breach. They are only awarded
in exceptional circumstances.

If there is an amount fixed in the contract to be paid in the event of

breach, damages are said to be liquidated. This will be payable where
the amount in the contract is a genuine pre-estimate of damages for
loss sustained through breach of contract: Dunlop Pneumatic Tyre Co v
New Garage (1915). Otherwise it will be construed as a penalty – a
penalty is not directed to the consequence of breach, but seeks to coerce
performance.

SPECIFIC PERFORMANCE (CACL4 p 258)

A decree of specific performance is an order of the court requiring a party
to perform the obligations under the contract. It is a remedy directed
towards enforcing the carrying out of the contract as agreed by the
parties. It is an equitable remedy and discretionary. It will only be
granted where damages do not provide an adequate remedy. Mostly
granted in relation to contracts for sale of land, where the goods are
unique, or rare.

NB Specific performance will not be granted

• Where damages are an adequate remedy
• Where the contract is for personal services
• Where the contract would require constant supervision by the
court
• Where it is not equally available to both parties.

INJUNCTION (CACL4 p 259)

An injunction is an order of a court restraining a person from
doing a wrongful act. It is an order restraining a party from
breaching their contractual obligations. An injunction will not be
granted where it would compel a person to do something that
he/she would not have been ordered to do by a decree of specific
performance. Like specific performance, an injunction is a
discretionary remedy. It may not be ordered where damages are
an adequate remedy or where there has been unreasonable
delay in applying for it.

RESTITUTION (CACL4 p 259)

Restitution refers to the remedies provided by law to compel the payment of money by
A to B where it would be unjust to allow A to retain the benefit of the money, goods or

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services which A has received at the expense of B. An action in restitution is usually
brought either because there is no express contract between the parties or the contract
is void or unenforceable.

The High Court regards the basis of restitution lies in the concept of unjust enrichment:
Pavey and Matthews v Paul (1987)

Restitution will usually be awarded only where

(i) The defendant has received some form of benefit (ie been enriched)
(ii) The benefit or enrichment are at the plaintiff’s expense
(iii) It would be unjust to permit the defendant to retain the benefit and
(iv) There are no defences available to the defendant eg illegality, incapacity,
estoppel.

Two basic situations

(a) Plaintiff is claiming return of money because of a total failure of consideration,

or where it was paid under a mistake of fact or law, or it was paid under
compulsion or duress
(b) Where the plaintiff is claiming a reasonable remuneration for work done or
services provided where there is no enforceable contract between the parties
(quantum meruit).

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 Summary for Week 9

What have we been looking at today?

Today we have considered the doctrine of privity of contract, that only parties to a
contract can sue on it to enforce rights. We also noted the exceptions to the doctrine
related to AGENCY, TRUST and Insurance Contracts.

Next we considered the ways in which a contract might be brought to an end

(discharged or terminated).

1. Performance ie fulfilment of its provisions

2. Agreement between the parties
3. Breach - where one party fails to fulfil his or her obligations under the contract
4. Frustration – where some supervening event prevents further performance of
the contract
5. By operation of law – bankruptcy and merger

Finally, we considered remedies available where the contract has not been
performed. These included

i. Damages – compensatory, nominal and exemplary

-remoteness, duty to mitigate loss

ii. Specific performance – equitable, discretionary, where damages are not an

adequate remedy, sale of land

iii. Injunction – equitable, discretionary, where damages are not an adequate

remedy, to stop the other party from breaching their obligations.

iv. Restitution – to avoid unjust enrichment – total failure of consideration,

reasonable remuneration.

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