Discharge of Contract Performance, Breach, Frustration Introduction Discharge of a valid contract involves the process under which the primary (performance) obligations come to an end. Discharge by breach will generally give rise to secondary obligations to pay damages. Discharge by performance will not give rise to secondary obligations, as the contract will have been successfully completed. Discharge by frustration does not give rise to secondary obligations but rights to restitution under statute. Discharge of a valid contract should be distinguished from termination of an invalid contract, as with Mistake & Restraint of Trade where the agreement is deemed to be void. In such instances no obligations can be said to have existed whereas in the case of a valid contract the primary obligations cease but the contract may remain in existence and give rise to the secondary obligations to pay damages. Frustration (link to mistake) - rights to restitution. In other words, where a contract is deemed to be frustrated, both parties are discharged from the contract. If frustrated, but one / both parties have incurred expenditure, or there has been money transferred, does the beneficiary party now have to repay it? Restitution compensation. Rather, one party unjustly unrich - put it right - equitable, etc.. Performance Most contractual obligations are strict in that they require absolute performance but some merely require the existence of reasonable care (e.g. SOGASA 1982 s13). In commercial contracts time clauses are normally regarded as crucial to the performance obligation and as such are classified as conditions, breach of which entitle the non-breaching party to treat his obligations as repudiated, as in the following case: Bunge Corp v Tradax Export SA [1981] 2 All ER 513 In this case, a contract for the purchase of 15,000 tons of Soya beans was to be shipped in 3 shipments of 5,000 tons. The buyers were to provide a cargo vessel at - 1 -
the port. Buyer was also required to give 15 days notice to the readiness of the ship. On one occasion, they gave this notice four days to late. Breach of contract or warranty? In these four days, the value decreases by $60.ton -1. The sellers sought to repudiate for breach. Buyers said no serious consequences here, so no right to repudiate. Other commercial background reasons? - exploitation of legal technicalities. House of Lords said that time clauses were so fundamental to the contract that they were in fact conditions as to commercial certainty. Therefore, the seller was entitled to repudiate the contract for breach. In some consumer contracts this requirement is relaxed and such clauses may be treated as warranties, breach of which does not discharge the non-breaching party of their performance obligations but instead merely gives a right to damages, (e.g. SOGASA 1982 s5a; SGA 1979 s15a), as amended by the SOGASA 1994 - statutory recognition of the inominate term. Where there has been only partial or defective performance, the non-breaching party may be prevented form repudiating the contract under the doctrine of substantial performance. This will only operate where the breach is trivial in the context of the overall performance obligation. The non-breaching party instead may claim damages, a set-off against the contract price. The doctrine is best illustrated by the following case: Hoenig v Isaacs [1952] 2 All ER 176 Plaintiff agreed to decorate flats for 750. Some of the work was defective. The defendant had already paid 400, and refused to pay the balance on the grounds of partial defective performance. To put this right, would cost 56. Court of Appeal said that the plaintiff was entitled to the 350 (i.e. the defendant was not able to be discharged because there was substantial performance) less the 56 cost of the repair. In contrast to the above case: Bolton v Mahadeva [1972] 2 All ER 1322 (177) Here, the plaintiff agreed to install central heating, costing 560. Performance partially defective. The householder discovered the defect, and the plaintiff (plumber) - 2 -
refused to fix it. The repair was valued at 174. So, the defendant refused to pay any of the 560 of the contract. Householder - defective central heating worth 560-174 = 386. Was the plumber entitled to payment? Or is the householder able to get away without paying? The court said that this was a more serious breach - the plaintiff was not entitled to any money at all. Householder discharged from any obligations. The distinction in this case is the relative value of the defect. Also, the non-breaching party must have a real choice in the matter - here, the plumber was refusing to repair it! Breach The effect of a breach of contract (at least where the breach consists of nonperformance or defective performance by the agreed time of performance) depends upon the classification of the term which has been breached as either a condition, warranty or innominate. The right to repudiate and treat the primary obligations as discharged arise in the case of the conditions but not warranties, and may arise the case of innominate terms depending upon the seriousness of the breach. (See previous lecture on Contract Terms) In certain circumstances one party may indicate an intention not to perform his obligations in advance of the time for performance. This has become known as anticipatory breach although it is more accurately described as breach by anticipatory repudiation. In this situation, the non-breaching party may elect either a) to affirm the contract, await the performance and then sue for breach, or b) treat the contract as immediately repudiated and himself as being discharged from his obligations: Hochster v De La Tour (1853) 2 El & Bl 678 The defendant engaged the plaintiff as a courier for their company. Plaintiff was not going to take up the new position until 2 months later. But, 1 month later, the defendant sent him a letter saying that he was no longer required. Plaintiff claimed in breach of contract - sought an immediate remedy for the breach. Defendants said that - 3 -
he couldn't do this unless he was able to show that he was willing and able t perform the contract at the contracted date. Court said that the plaintiff in these circumstances could elect to: 1) Sit and wait until the time of performance, demonstrate ready and willing and able to perform - then would be able to sue for the breach 2) Immediately repudiate. In other words, on the basis of the letter, he could then repudiate the contract immediately. - The advantage being that he would incur less expenditure. There must be clear evidence a) of the intention not to perform, and b) of the nonbreaching party s choice of election: Woodar v Wimmpey [1980] 1 All ER 571 * DANGER AREA! * Contract involving sale of a land from plaintiff to defendant, contract price was 850,000. There was a clause in the contract that the defendant could repudiate if three was a compulsory purchase order (CPO) before the completion date for the transfer of the land. A CPO was made - made known to both parties. The defendant wanted to repudiate because of the condition materialising. Plaintiff said no - you were wrong to repudiate - not entitled - an unlawful anticipatory breach - we're entitled to claim damages form you. Loss of profits to the seller. Could he claim damages? Alternatively, was the buyer entitled to repudiate? House of Lords held that due to the clause, the defendant was entitled to repudiate. Therefore, the claim by the seller was not upheld - look at the whole conduct of the parties - clear and unequivocal intentions. Relates to frustration? Frustration In a limited number of circumstances, frustrating events may be regarded by the courts as affecting the contract in such a fundamental manner as to render further performance of the contract impossible. Subject matter did exist at the time of the contract, but subsequently, through no fault of either party, now it doesn't! * Key question - is the impossibility caused by a state of affairs before or after the contract was made? Historically, English law did not recognise the doctrine until the following case, where the approach adopted by Blackburn J was to imply a term into - 4 -
the contract which in effect provided for the discharge of the contract in the event of unforeseen circumstances arising which rendered performance impossible and where the parties were not at fault. Taylor v Caldwell (1863) 3 B & S 826 Plaintiff hired the defendant's hall for some concert performances - 4 days, 100. Contract was formed, agreement. But, the hall accidentally burned down. Plaintiff was now stuck, as he had no hall, no money from sales - suffered loss. No provision in the contract for this arising. Plaintiff sued the defendant - defendant cannot provide the hall. Defence - how can I? - not my fault! The contract was now frustrated due to an extraneous event. Blackburn agreed with the defence argument - the contract is subject to tan implied condition that parties will be excused if performance becomes impossible from the perishing of the thing without the default of the contractors. Lords - circumstances unforeseen - involving no fault of either party. By such means the courts were able to intervene on the basis of effecting the presumed intention of the parties. More recently, in the following case, the House of Lords preferred an approach based on ascertaining the true construction of the contract. In effect, if the changed circumstances rendered the obligation under the contract fundamentally different from that which was contracted for, then the contract will be terminated for frustration and the parties discharged from their obligations. Davis v Fareham UDC [1956] 2 All ER 145 Davis were contractors - to build 78 houses over 8 months. There was a labour shortage at the time, delayed completion of contract - actually nearly 22 months. Davis claimed a larger sum of money on a Quantum Mires basis. Was the contract still a binding one? House of Lords said is this contract frustrated? Due to extraneous events? Originally, the contract was not binding, since: a) There was adequate labour b) The contract would be frustrated if there was a labour shortage No - not going to look for an implied term, no frustration. Merely, there is a performance obligation more onerous than conceived to be. Lord Reed said that the doctrine of frustration was not based on an implied term notion, instead there were tow facts to be considered: - 5 -
1) Nature of the contract itself 2) Circumstances surrounding the contract at the time of it's formation. This should be contrasted with the doctrine of contractual mistake (see previous lecture notes) where the facts rendering the performance impossible exist prior tot the formation of the contract. The doctrine of frustration addresses the problem of the frustrating arising after formation. The distinction may turn on the question of timing, as is illustrated in the following case: Amalgamated Investment & Property v John Walker & Sons [1976] 3 All ER 509 Purchased property from the defendant, advertised as suitable for development. Asked if it was of listed status. Defendant replied that it was not, which was correct at the time. The Department of the Environment put this on a list of proposed properties to be listed. After the contract was signed, the Department of the Environment took the decision to list the property - so, no development was possible any longer, and the value of the land fell from 1.7m to 200,000 - a loss of 1.5m. Claimed that the contract should be void for mistake. Courts said - sorry - at time of formation the property was not listed, so there's no mistake. Frustrated? Court of Appeal said - no - there's no radical difference to the performance of the contract - the risk has to be borne by the purchaser. Problems can arise where one or both parties has incurred expenses in connection with the contract prior to termination and there is no provision in the terms of the contract to determine which party should bear such risks. The common law approach, based on a non-interventionist philosophy, was to leave such losses where they fell. However, since the enactment of the Law Reform (Frustrated Contracts) Act 1943, a statutory framework has existed which attempts to ameliorate some of the harshness of the common law approach. The LR(FC)A does not have any bearing on the question of whether the intervening event operates to frustrate the contract, it merely determines the legal effect of a court declaring a contract to be frustrated. - 6 -