TERMINATION OF

CONTRACT
M.A. Bùi Hà Hạnh Quyên: hanhquyen2606@gmail.com
Faculty of Economics, Academy of Finance, Hanoi, Vietnam
 Content
• I. DISCHARGE OF CONTRACT
• II. REMEDIES FOR BREACH OF CONTRACT
• III. EXTINCTION OF REMEDIES
I. DISCHARGE OF CONTRACT
 1. PERFORMANCE
• Both parties have discharged their obligations unders the
contract
• Neither party has any right against, or obligations to, the
other.
• The general rule is that performance must exactly match the
requirements laid down in the contract, and this is known as
entire performance.
 Example: Cutter v Powell (1795)
• A sailor had contracted to serve on a ship travelling from
Jamaica to Liverpool. He was to be paid 30 guineas for the
voyage, payable when the ship arrived in Liverpool, but he
died during the journey. His widow sued for his wages up
until his death, but her claim was unsuccessful. The court
held that the contract required entire performance and, as
he had not completed performance, she could claim
nothing. .
Mitigation of entire performance rule
 Substantial performance

• A party who has performed with only minor defects

to claim the price of the work done, less any money
the other party will have to spend to put the defects
right.
 Example: Hoenig v Isaacs (1952)
• An interior decorator contracted to refurbish a flat for £750.
The defendant had paid £400 in advance, but then refused to
pay the remaining £350, arguing that the design and
workmanship were defective. The court agreed that there were
problems with the work done, but the cost of putting these
right would only be £56. Consequently it was held that the
decorator had substantially performed, and was entitled to the
balance of the contract price, less the £56 needed to put right
the defects.
 Severable contracts

• A contract is said to be severable where payment

becomes due at various stages of performance,
rather than in one lump sum when performance is
complete.
 Voluntary acceptance of partial
performance
• In some cases, while a contract may not originally have
been intended to be severable, one party may later
agree to accept and pay for part-performance from the
other.
• Where such an agreement can be inferred from the
circumstances, the claimant sues on a ‘quantum
meruit’, to recover the cost of such performance as has
been provided
 Example: Sumpter v Hedges (1898)
• A builder agreed to construct two houses and a stable on the defendant’s
land for £565. However, he abandoned the project after completing £333
worth of work, so the defendant had to complete the building himself, and
did so using materials left behind by the builder. The builder claimed on a
“quantum meruit” (Latin for ‘as much as is deserved’) for work done and
materials supplied. The claim for the work failed; the defendant was not
choosing to accept part-performance and finish the job himself; he had no
real alternative but to complete the building, which would otherwise be just
a useless mess on his land. However, he did not have to use the materials left
behind, and so the builder was allowed to claim for these.
Prevention of performance by other party

• Where one party performs part of the agreed

obligation, and is then prevented from completing
the rest by some fault of the other party, a quantum
meruit can be used to claim the cost of the work
done.
 Example: Planché v Colburn (1831)

• Where the plaintiff was contracted to write a book

on costume and ancient armour, for a fee of £100.
After he had begun writing, the defendants decided
to cease publishing the series of which the book was
to form a part. The author was able to recover £50
on a quantum meruit.
 Breach of terms concerning time
• Late performance will always amount to a breach of contract
giving rise to a right to damages.
• It will only give rise to a right to terminate the contract if the
delay constitutes a substantial failure to perform, or if the time
of performance is treated as being ‘of the essence’.
• When time is ‘of the essence’, any failure to perform on time
justifies the termination of the contract, even if little or no
hardship is caused.
 Vicarious performance

• The general rule is that the other party cannot

object to such vicarious performance unless it
prejudices their interests.
• Where vicarious performance is permitted, liability
for performance nevertheless remains with the
original contracting party.
 Example: Stewart v Reavell’s Garage
(1952)
• The plaintiff took a 1929 Bentley to the defendants’ garage, to
have the brakes relined. The defendants suggested that the work
should be done by a sub-contractor and the plaintiff agreed.
Unfortunately, the work was done badly, and the brakes failed,
with the result that the plaintiff was injured. The defendants were
clearly entitled to perform vicariously, as the plaintiff had agreed
to their doing so, but they were still liable for the sub-contractor’s
defective workmanship.
 2. DISCHARGE BY FRUSTRATION

• Occurs when performance of contract is impossible

(not just impractical or uneconomic) due to factors
outside the control of parties
• Parties are discharges from their future obligations
under the contract
 Requires
• 1. Significant change in the nature and conditions affecting
the contractual rights and obligations
• 2. Neither party to the contract has caused the change
• 3. The change not contemplated at formation
• 4. Unjust to uphold contract in new circumstances
 Categories
• It is impossible to compile an exhaustive list of the
situations in which a contract will become frustrated, but
they fall into three broad categories:
1. events which make performance or further performance
impossible;
2. those which make it illegal;
3. those which make it pointless
 Examples

1. Destruction of the subject matter

2. Personal incapacity to perform a contract of
personal service
3. Government intervention
4. Non – occurrence of an event which is the sole
purpose of the contract
 Example:
Krell v Henry (1903)
• In 1901, a coronation procession was organised for King Edward
VIII, but it had to be cancelled at the last minute because the King
was ill. Someone had hired a flat for the day from which to view the
procession. He refused to pay the day’s rent, because he said the
contract had been frustrated. The court said he was right - the whole
point of hiring the room was to watch the procession; if the procession
wasn’t going to happen, then there was no benefit to be gained from
hiring the room!
 3. BREACH OF CONTRACT

• When one party performs defectively, differently

from the agreement, or not at all (actual breach), or
indicates in advance that they will not be
performing as agreed (anticipatory breach) =>
Breach
Actual breach
 Example: Pilbrow v Pearless de
Rougemont & Co (1999)
• The appellant had telephoned a firm of solicitors and asked to make an
appointment with a solicitor. The appointment was arranged with an employee
who was not a qualified solicitor. He was not informed that the employee was not
a solicitor. The appellant was dissatisfied with the quality of the legal services he
had received and refused to pay the outstanding fees. The firm sued for their fees.
The Court of Appeal accepted that as a matter of fact the standard of legal
services provided had been that of a competent solicitor. But it ruled that there
had been a contract not just to provide legal services, but to provide legal services
by a solicitor. The firm did not perform that contract at all. No legal services
were provided by any solicitor; they therefore had no right to any payment.
 Anticipatory breach

• Where an anticipatory breach occurs, the other

party can sue for breach straight away; it is not
necessary to wait until performance falls due.
EXAMPLE: Hochster v De la Tour (1853)
The parties had made a contract in April under which the plaintiff would
be a tour leader in Europe for the defendant beginning on 1 June. In May
the defendant informed the plaintiff that his services were no longer
required. The plaintiff started his action for breach of contract on 22
May. The defendant argued that he should be required to wait until the
date performance was due, which was 1 June, as there was no breach of
contract until that date.
The court rejected this argument. The plaintiff could commence
proceedings immediately for damages, even though the date of
performance had not yet arrived
Effect of breach
 Note

• If the innocent party elects to treat the contract as

discharched, they must notify the other party of
their decision.
 4. AGREEMENT

• In some cases the parties will simply agree to

terminate a contract, so that one or both parties are
released from their obligations.
 Novation

• Novation is the name given to a specific type of

discharge by agreement. It arises where there are
two contracts, and the same person is a debtor
under one contract and a creditor under the other;
the first two contracts are discharged and a new one
is created.
 Condition subsequent

• Sometimes contracting parties will agree at the start

that, if a certain event occurs, the contract will come
to an end.
 Example: Bland v Sparkes (1999)
• Bland had been an international swimmer and was engaged as a consultant by the
Amateur Swimming Association (ASA) to promote the ASA awards scheme. The
consultancy contract allowed the ASA to terminate his engagement if he was
convicted of any serious criminal offence or was otherwise guilty of conduct
bringing the Association or himself into disrepute (the condition subsequent). The
ASA discovered that before the contract was made, the claimant had received bribes
or secret commissions to make commercial recommendations to the ASA’s clients. It
decided to terminate the contract. The claimant sought damages for breach of
contract. The Court of Appeal held that the claimant’s conduct had brought the ASA
into disrepute and the ASA was therefore entitled to terminate the contract.
 II. REMEDIES FOR BREACH OF
CONTRACT
• The remedies available to the innocent party in the event of
a breach of contract can be divided into three categories:
1. Common law remedies,
2. Equitable remedies
3. Remedies agreed by the parties.
 1. COMMON LAW REMEDIES

All common law remedies are available as of right if a

contract is breached.
• Damages
• Action for an agreed sum
• Restitution
 a. Damages
• It is an award of money that aims to compensate the innocent party for
the losses they have suffered as a result of the breach.
• The general rule is that innocent parties are entitled to such damages as
will put them in the position they would have been in if the contract had
been performed.
• When a contract is breached, a party may suffer pecuniary loss (that is
to say financial loss) or non-pecuniary loss.
 Pecuniary loss

• Damages aim to compensate the innocent party for

their financial losses that result from not receiving
the performance bargained for. In general, such
losses include physical harm to the claimants or
their property and any other injury to their
economic position.
 Non-pecuniary loss
• General, damages for mental distress are not awarded for commercial contracts.
• More recently, the House of Lords has allowed damages for non-pecuniary loss
where a major object (though not the whole purpose) of the contract was to
provide pleasure, relaxation and peace of mind. Mental suffering can be
compensated if it is related to physical inconvenience and discomfort caused by
the breach of the contract.
• Where a contract is for the provision of a product for leisure activities and this
contract is breached, damages for loss of pleasure and amenity may be awarded.
 Example: Diesen v Samson (1971)

• The defendant had been booked to take

photographs at the claimant’s wedding. He failed to
attend and damages were awarded to the bride for
the distress of having no wedding photographs. It
was a contract under which the bride would get
pleasure looking at the photographs in the years
ahead.
Limitations on awards of damages
 Causations
• A person will only be liable for losses caused by their breach of
contract.
• The defendant’s breach need not be the sole cause of the claimant’s
losses, but it must be an effective cause of their loss.
• Sometimes a loss can be caused partly by a breach of contract and
partly by some other factor. The general rule is that where breach can
be shown to be an actual cause of the loss, the fact that there is
another contributing cause will not prevent the existence of causation.
 Example: Quinn v Burch Bros (Builders)
Ltd (1966)
• The plaintiff was an independent subcontractor carrying out such
building work as plastering on a building project. In breach of their
contractual undertaking to supply equipment ‘reasonably necessary’
for the work, the defendant failed to supply a step ladder. The plaintiff
found a folded trestle, and stood on it to do the work. He slipped and
broke his hand. The Court of Appeal held that the cause of the
plaintiff’s injury was his own choice to use unsuitable equipment. The
defendant’s breach of contract was only the occasion for the accident,
not its legal cause.
 Example: County Ltd v Girozentrale
Securities (1996)
• The plaintiffs’ bank agreed to underwrite the issue of 26 million shares in a publicly
quoted company. The defendants were stockbrokers who were engaged by the plaintiffs to
approach potential investors in the shares. The brokers breached the terms of their
contract and, in due course, the plaintiffs found themselves with some 4.5 million shares
on their hands which, the price of the shares having fallen, represented a loss of nearly £7
million. They sued the stockbrokers, and the main issue in the case was whether the
plaintiffs’ loss was caused by the defendants’ breach of contract. In effect, the plaintiffs
would not have suffered their loss if there had not been a concurrence of a number of
events, of which the defendants’ breach of contract was but one. The Court of Appeal held
that the brokers’ breach of contract remained the effective cause of the plaintiffs’ loss; the
breach did not need to be the only cause. The defendants were therefore liable to pay
damages.
 Remoteness
• There were some losses as a result of breach of contract, however, it
was considered too remote. It is therefore unfair to ask the defendant
to pay damages for those losses.
• Damages will be awarded for:
(1) loss which would arise naturally from the breach of contract and
(2) loss which may reasonably be supposed to have been in the
contemplation of the parties when they made the contract, as the
probable result of its breach.
 Example
• A taxi driver is booked to take a passenger to the airport in
time for a certain flight to New York, where the passenger
expects to complete a deal worth £1 million. If the taxi driver
breaches the contract by arriving late and makes the
passenger miss the flight, the taxi firm may be liable for
expenses such as any extra cost for getting the next flight, but
is unlikely to be expected to compensate the passenger for the
lost £1 million.
 Example:
Victoria Laundry (Windsor) Ltd v Newman Industries Ltd
(1949)
• The plaintiffs were launderers and dyers, who needed to buy a large boiler in order to expand their
existing business and take on a very well-paid Government contract. They contracted to buy such a
boiler, second-hand, from the defendants, making it clear that it was needed for immediate use. As the
defendants dismantled the boiler in preparation for delivery, it was damaged, and so the delivery was
considerably later than agreed. The launderers claimed loss of profits under two heads: £16 per week
for the loss of ‘normal’ profits, which represented the additional ordinary work they could have taken
on with the extra boiler; and £262 per week for the loss of a lucrative dyeing contract with the
Government.
• Evidence was given that although the defendants knew the plaintiffs wanted the boiler working as soon
as possible, they did not know about the Government contract, or the fact that it was so much more
lucrative than the laundry’s other work. As a result, the Court of Appeal held that they were liable for
the £16 per week, but not for the £262. The court stated that a defendant should only be liable for such
losses as were ‘reasonably foreseeable’ as arising from the breach.
 Mitigation
• Claimants cannot simply sit back and allow losses to pile up
and expect the defendant to pay compensation for the whole
amount if there is something they could reasonably do to
reduce the loss. Claimants are under a duty to mitigate their
loss, and cannot recover damages for losses which could
have been avoided by taking reasonable steps.
 Example
• If Jane has a contract with David to repair the machines in
his factory, and fails to carry out her duties as agreed,
David cannot simply keep the factory idle for years and
submit a claim for lost profits; he will only be able to claim
for such losses as he could not reasonably avoid by taking
steps, such as finding a replacement machine, or an
alternative source of repairs
 Action for an agreed sum
• Where a contract specifies a price to be paid for performance, and payment has
not been made, the party who has performed can claim the price owing by means
of an action for the agreed sum.
• Although the claim is obviously for money, this is not the same as a claim for
damages. This is a claim for a debt and not a claim for damages. The claimant is
not seeking compensation, but simply enforcement of the defendant’s promise to
pay.
• However, where the claimant has suffered additional loss, beyond not receiving
the agreed price, damages can be claimed alongside the agreed sum and the claim
for damages follows the usual rules on remoteness and so on.
 Restitution
• Restitution is the remedy available when there has been unjust enrichment.
• Restitution seeks to restore money paid or the value of a benefit conferred in
circumstances in which no contract exists, or in which there is no longer any
obligation to perform under a contract.
• Restitution will therefore be available where there is no contract:
 a quasi – contract;
the contract has been discharged; or
the contract was void.
 Example
• Peter and Oliver enter a contract under which Peter agrees to deliver a
basket of fruits at Oliver’s residence and Oliver promises to pay Rs 1,500
after consuming all the fruits. However, Peter erroneously delivers a basket
of fruits at John’s residence instead of Oliver’s. When John gets home he
assumes that the fruit basket is a birthday gift and consumes them.
• Although there is no contract between Peter and John, the Court treats this
as a Quasi-contract and orders John to either return the basket of fruits or
pay Peter.
 Example:
Attorney General v Blake (2000)
• In 1961 a spy, George Blake, was sentenced to 41 years’ imprisonment. He escaped from
prison in 1966 and went to live in Moscow. In 1990 he published his autobiography, in
which he described his life as a spy. This was a breach of contract because when he joined
the secret services he had signed an agreement that he would never reveal anything about
this work. The case was brought because Blake’s British publishers had £90000 which they
intended to pay to Blake.
Held:
• Blake had to account to the Government, the other contracting party, for the profits he had
made by doing the very thing he had contracted not to do. Such a remedy would arise only
in very exceptional circumstances and only where the claimant had a legitimate interest in
preventing the defendant’s profit-making activity and of depriving him of his profit.
 Example
Rowland v Divall [1923]
• The claimant, a car dealer, bought a car from the defendant for £334. He painted the car
and put it in his showroom and sold it to a customer for £400. Two months later the car
was impounded by the police as it had been stolen. It was then returned to the original
owner. Both the claimant and defendant were unaware that the car had been stolen. The
claimant returned the £400 to the customer and brought a claim against the defendant
under the Sale of Goods Act.
Held:
• The defendant did not have the right to sell the goods as he did not obtain good title
from the thief. Ownership remained with the original owner. The defendant had 2
months use of the car which he did not have to pay for and the claimant was not entitled
to any compensation for the work carried out on the car.
 Home work
• Take 2 examples:
1. Anticipatory breach
2. Discharge by breach of contract
 b. Equitable remedies
• Where common law remedies are inadequate to compensate the
claimant, there are a range of equitable remedies. However, these are
not available as of right, merely because the defendant is in breach.
They are provided at the discretion of the court, taking into account
the behaviour of both parties and the overall justice of the case.
• Include:
- Specific performance
- Injunction
 Specific performance
• An order of specific performance is a court order compelling
someone to perform their obligations under a contract. The equitable
remedy of specific performance does compel the party in breach to
perform.
• In practice, specific performance only rarely applies.
 Damages must be inadequate
• Specific performance is only granted where damages alone would be
an inadequate remedy. It is not, therefore, applied where the claimant
could easily purchase replacement goods or performance. Where the
goods that are the subject of the contract are in some way unique,
then specific performance can be available.
• Where the damages would only be nominal, specific performance
may be ordered to avoid one party being unjustly enriched.
 Example: Beswick v Beswick (1968)
• The plaintiff’s husband sold his business to his nephew in return for an annual allowance
to be paid to himself and, after his death, to his widow. Once the husband died, the
nephew refused to make payments to the widow. Despite the fact that the husband had
clearly intended her to benefit from the contract, it was held that the widow could not sue
the nephew on her own behalf, because she was not a party to the contract.
• However, the widow was allowed to sue as the executor of her husband’s estate. The
circumstances were such that the husband suffered no loss, because he had died before the
nephew stopped paying the annuity, so damages would only have been nominal. It was
clearly unjust for the defendant to keep the entire benefit of the contract without himself
performing much at all. As a result, specific performance was ordered.
 Hardship to the defendant

• Because specific performance is a discretionary

remedy, the court will not apply it to cases where it
could cause the claimant great hardship or
unfairness.
 Example: Patel v Ali (1984)
• The plaintiff had requested specific performance on a contract for
the sale of a house. The claim was delayed by four years (through
no fault of either party) and in this time, the seller’s husband had
gone bankrupt and she had become disabled. As a result, she
needed to be near friends and relatives, and moving house would
have caused her hardship. Consequently, the court refused
specific performance and ordered damages instead.
 Contracts made unfairly

• Equity also allows the court to refuse specific

performance of a contract which has been obtained
by unfair means, even if they do not amount to the
sort of vitiating factor which would invalidate the
contract.
 Example: Walters v Morgan (1861)
• The defendant purchased some land. The claimant wished to mine the
land and produced a draft lease and pressured the defendant into
signing the lease before he realised the value of the land. Once the
defendant had discovered the true value, he refused to allow the
defendant to mine the land. The claimant sued for breach of contract
and sought specific performance, but the court refused, on the grounds
that the plaintiff had taken advantage of the fact that the defendant had
not really known the value of the lease at the time the agreement was
made.
 Contracts unsuitable for specific
performance
• Some types of contract are, by their nature, unlikely to be
the subject of an order for specific performance. The two
main types are contracts involving personal services (such
as employment contracts), where specific performance
would infringe personal freedom, and contracts which
involve continuous obligations.
 Example: Ryan v Mutual Tontine
Association (1893)
• The lease of a flat promised tenants that a resident porter
would be ‘constantly in attendance’. The person appointed
had other employment, and so was in fact often absent from
the flats. The court refused specific performance of this
term of the lease because it would require a level of constant
supervision beyond that which the court was able to assess.
 Injunction

• An injunction is a court order requiring a person to do

or not to do a certain act. It can be used to prevent a
party from breaking the terms of his contract.
 Classification
• A mandatory injunction which is restorative in its effect. It directs the defendant
to take positive steps to undo something they have already done in breach of
contract, for example to demolish a buiding that they have erected in breach of
contract. This is a relatively rare remedy and will only be granted where it will
produce a fair result in all the circumstances.
• A prohibitory injunction which requires the defendant to observe a negative
promise in a contract.
• An asset - freezing injuction prevents the defendant from dealing with assets
where the claimant can convince the court that they have a good case and that
there is a danger of denfendant's assets being exported or dissipated.
 Example
• Ken, a horse owner, rents a field from Julie, and it is a term of their
agreement that no buildings should be put up on the land. If Julie
discovers that Ken is about to build a stable, she could apply to the court
for an injunction to prevent him doing so. This is called a negative (or
prohibitory) injunction.
• Where the action has already taken place (if Ken has already built the
stable, for example) the court may make a mandatory injunction, which
orders the defendant to take action to restore the situation to that which
existed before the defendant’s breach – so Ken would have to demolish the
stable.
 Example:
Warner Bros Pictures Inc v Nelson (1937)
• The actress Bette Davis had signed a contract with Warner Brothers, under
which she agreed not to work for any other film company for a year. During
this period, she contracted with another company, in breach of the Warner
Brothers contract, and Warner Brothers sought an injunction to stop her
actually working for the rival company. Although the practical effect was to
make Ms Davis work for Warner Brothers, because she could not work for
anyone else, the order could be distinguished from specific performance on
the grounds that it was an encouragement to work for the plaintiffs, and not
a compulsion, because in theory she could have simply made her living in
some other way, and not acted in anyone’s films.
 c. REMEDIES AGREED BY THE
PARTIES
• Many contracts, particularly commercial ones, specify the
kinds of breach which will justify termination, and/or the
damages to be paid by each party in the event of certain
types of breach.
• There are two types of contract clauses concerning
damages: liquidated damages clauses and penalty clauses.
 Liquidated damages clauses
• Liquidated damages is the term used where a contract specifies the
amount of damages to be paid in the event of breach and this amount
represents a genuine attempt to work out what the loss would be in the
event of such a breach. In such a case, the court will allow the claimant
to recover this amount without proof of actual loss, even if the actual
loss is larger or smaller than the sum laid down in the contract.
• The usual rules as to damages are excluded (damages which are not
fixed by a contract, are described as unliquidated damages).
 Example
• Gerald has agreed to purchase Reta’s home for $50,000. As part
of the agreement, he must put down a deposit of $5,000. Both
parties agree that if either of them does not follow the terms of
the contract, the other person gets the $5,000 deposit. If Gerald
fails to follow through with the purchase, Reta gets to keep the
$5,000. If Reta decides she does not want to sell her home to
Gerald, she must return the $5,000 and pay more $5,000 for
Gerald
 Penalty clauses
• If a contract states that a particular sum is to be paid on breach of the
contract, and that sum is not a genuine pre-estimate of the loss that
would be suffered in the event of breach, but is designed instead to
threaten to penalise a party in breach, this is a penalty clause.
• Where the damages laid down in a contract amount to a penalty
clause, the clause will be found to be invalid and the award of
damages will be determined by the ordinary principles of contract
law instead.
 Example
• A builder agrees to build a new shop, and that a term of the contract provides that if the shop
is not ready on time the builder will pay £1000 damages for every week that completion is late.
• If the court considered that this sum of £1 000 a week was what the parties genuinely thought
the loss to the shop owner would be, when the contract was made, then the term would be
liquidated damages and the builder would have to pay at the rate of £1000 a week no matter
what the actual loss which the shop suffered. (The £1000 a week would have been a ‘genuine
pre-estimate of the loss’.)
• If the court considered that the figure of £1 000 a week was not what the parties thought the
loss would be, but was designed to warn the builder against breaking the contract, then the
term would be a penalty and would be ignored. Damages would then be calculated in the usual
way.
 Distinguishing penalties and liquidated
damages
• (1) If the stipulated damages are greater than could conceivably flow from the breach then the clause
providing for such damages will be a penalty.
• (2) ‘It is no obstacle to the sum stipulated being a genuine pre-estimate of damage, that the consequences
of breach are such as to make precise pre-estimation almost an impossibility. On the contrary, that is just
the situation where it is probable that pre-estimated damage was the true bargain between the parties.’
• (3) The clause will be presumed to be a penalty if it makes the same sum payable as damages for several
different breaches which are likely to cause different amounts of loss.
• (4) If the breach of contract consists solely of not paying a fixed sum of money, and the clause provides
that in the event of breach a greater sum shall be payable as damages, this will invariably be a penalty.
• (5) Calling the clause a ‘penalty’ or ‘liquidated damages’ is relevant in deciding its status but is not
decisive.
 III. EXTINCTION OF REMEDIES
• Where one party has a right of action for breach of
contract, this right may be extinguished by agreement
between the parties, either by a release under seal or by
accord and satisfaction. Such a right can also be
extinguished by the passage of time.