📝 Law (9084) A Level Contract Law: Discharge of a Contract
Hello future legal expert! This chapter is all about understanding when a contract officially comes to an end—when the parties are legally free from their obligations. Think of "Discharge" as the contract hitting the 'finish line.' Knowing these rules is crucial because it determines whether a party can claim a remedy (like damages) or if the contract simply dissolved naturally. Let's dive in!
3.3 Discharge by Performance
The most common and satisfying way a contract ends is when both parties fulfill exactly what they promised to do. This is known as Discharge by Performance.
The Entire or Strict Performance Rule
At common law, the general rule is strict: performance must be precise and exact. If you promise to do something whole, you must complete the whole job before you are entitled to payment.
- The Rule: The party must complete all obligations exactly as specified in the contract. Failure to complete the job entirely means the contract is not discharged by performance, and the performing party may receive nothing (unless an exception applies).
- Classic Example: Cutter v Powell (1795). A sailor died mid-voyage. His wife could not claim any wages because the contract required him to serve for the entire voyage; performance was not complete or strict. This is a very harsh rule!
Exceptions to the Entire or Strict Performance Rule
Because the strict rule can be highly unfair (as seen in Cutter v Powell), the courts developed several exceptions to allow a party to claim some payment even if performance wasn't 100% perfect or complete.
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Substantial Performance
If the party has performed the main bulk of the contract, even if there are minor defects, they may be entitled to the contract price, minus the cost of remedying the defects.
- Example: A builder installs 95% of the plumbing correctly, but one minor pipe leaks. The owner cannot refuse all payment; the builder gets paid the full price, minus the amount required to fix the leaky pipe (Dakin v Lee 1916).
- Key idea for students: The breach must be minor, not fundamental.
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Voluntary Acceptance of Partial Performance
If one party performs only part of the contract, and the other party freely chooses to accept that partial performance (even though they didn't have to), then payment is due on a quantum meruit basis (as much as earned).
- Important Note: The acceptance must be voluntary. If the party has no choice (e.g., they receive a half-built wall on their land), this exception does not apply.
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Divisible Contracts
Contracts that can be naturally broken down into separate parts or stages are treated as several mini-contracts. Completion of one stage entitles the party to payment for that stage.
- Example: A contract to deliver 10 shipments of coal, paid for per shipment. Each delivery is a divisible part.
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Prevention of Performance
If one party is ready to perform but is prevented from doing so by the other party, the innocent party can treat the contract as discharged and claim payment for the work done (or damages).
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Tender of Performance
If one party offers to perform (tenders performance) but the other party refuses to accept it, the offering party is discharged from their obligation. They have done everything required of them.
- Analogy: You offer your friend the £5 you owe them, but they refuse to take it. You are still discharged from the debt.
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Time of Performance
If time is made a condition of the contract (expressly or impliedly), failure to perform on time is a breach of condition, discharging the innocent party. If time is treated only as a warranty, failure to be punctual does not discharge the contract.
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Vicarious Performance
This occurs when the promisor performs their contractual obligations through a third party (an employee or sub-contractor). Provided the contract does not require personal performance, this is usually acceptable and counts as full performance by the original contracting party.
- Example: Hiring a painting company (P) means P can send any competent painter (a third party) to do the job. If P hires a specific portrait artist, performance might be deemed personal.
Quick Takeaway: Strict performance is the rule, but courts prefer the fairness offered by exceptions like Substantial Performance to prevent unjust enrichment.
3.3.2 Discharge by Breach
A contract is discharged by breach when one party fails, refuses, or indicates they cannot fulfill their obligations under the contract.
Important: Not every minor breach discharges the contract. Only a breach of a condition (a vital term) or a serious breach of an innominate term will discharge the contract and allow the innocent party to terminate it (repudiate). A breach of a warranty only entitles the victim to damages, not termination.
Types of Breach
1. Actual Breach
An Actual Breach occurs when the date for performance arrives, and one party either:
- Fails to perform their obligations entirely.
- Performs defectively (e.g., delivers poor quality goods).
The innocent party can then sue for damages. If the term breached is a condition, they can also treat the contract as repudiated (ended).
2. Anticipatory Breach
An Anticipatory Breach occurs *before* the date set for performance. One party informs the other (either expressly or by their conduct) that they will not perform their side of the contract when the time comes.
When an anticipatory breach occurs, the innocent party has two options:
- Accept the Repudiation: Treat the contract as immediately discharged and sue for damages right away. (Hochester v De La Tour 1853).
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Affirm the Contract: Ignore the breach, wait for the performance date, and hold the breaching party to the contract.
- Warning! If the innocent party chooses to affirm, they risk the occurrence of a frustrating event in the interim, which would discharge the contract by frustration, potentially eliminating their right to damages (Avery v Bowden 1855).
Quick Review: Actual breach happens now; Anticipatory breach is the warning that a breach will happen later.
3.3.3 Discharge by Frustration
Frustration is a complex but fascinating doctrine. It applies when, after the contract is formed, an unforeseen, supervening event occurs that makes performance impossible or radically different from what was agreed.
The Concept of Frustration
A contract is frustrated when an external event, outside the control of either party, occurs, rendering the obligations impossible or commercially pointless to perform. This automatically and immediately terminates the contract.
- Did you know? The doctrine of frustration developed largely after the harsh ruling in Paradine v Jane (1647), which stated that once a promise is made, it must be kept, regardless of circumstances. The modern doctrine started with Taylor v Caldwell.
Types of Frustrating Event
1. Impossibility of Performance
This occurs if the contract can no longer physically be performed.
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Destruction of Subject Matter: If the specific thing essential to the contract is destroyed.
Example: Hiring a music hall that then burns down (Taylor v Caldwell 1863). - Non-Availability of a Person: Where the contract requires personal performance, and that person becomes unavailable (e.g., through death, illness, or imprisonment).
2. Supervening Illegality
If a change in the law, occurring after the contract is made, renders performance of the contract illegal.
- Example: A contract to sell goods to a country that then becomes an enemy nation due to a declaration of war.
3. Change of Circumstance Making Performance Pointless (Frustration of Purpose)
The contract can still physically be performed, but the underlying purpose for entering the agreement has vanished due to an unforeseen event.
- Classic Example: Krell v Henry (1903). A room was hired specifically to watch King Edward VII's coronation procession. When the procession was cancelled due to the King's illness, the contract was frustrated because the core purpose was gone, even though the room was still available.
Contrast with: If the purpose is still possible, even if less profitable, there is no frustration (e.g., hiring a boat that day when the coronation is cancelled, but the boat could still be used for a cruise).
Limitations on the Doctrine of Frustration
The doctrine of frustration is applied very narrowly by the courts. It will not apply if:
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Contractual Provision (Force Majeure Clause)
If the contract includes an express clause (often called a force majeure clause) dealing with the consequences of the particular supervening event (e.g., fire, war, strikes), the contract terms will apply instead of the doctrine of frustration.
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Inconvenience or Additional Expense
If the event merely makes the contract more difficult or expensive to perform, it is not frustration. The party must bear the financial risk.
- Example: A shipping route closes, meaning the ship must take a much longer, more expensive route. This is just an added cost, not frustration (Davis Contractors v Fareham UDC 1956).
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Foreseen or Reasonably Foreseeable Event
If the event was reasonably foreseeable when the contract was made, the parties should have provided for it. If they didn't, the risk lies with them.
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Self-Induced Frustration
The frustrating event must be genuinely external. If the event is caused by the fault or choice of one of the parties, it is treated as a breach, not frustration.
- Example: A ship owner had two ships but only needed one licence. They chose to use the licence on a different ship, thus frustrating the contract for the first ship. This was held to be self-induced (Maritime National Fish v Ocean Trawlers 1935).
The Effect of Frustration
Effect at Common Law (Pre-1943)
Under common law, frustration meant the contract ended automatically at the moment of the frustrating event. The harsh rule was that money paid before the frustrating event could not be recovered, and money payable before the event was still due. Losses lay where they fell (Chandler v Webster 1904).
Effect under the Law Reform (Frustrated Contracts) Act 1943
To combat the unfairness of the common law, Parliament passed the 1943 Act. This Act provides a statutory mechanism for adjusting the financial rights of the parties post-frustration.
Section 1(2)
This section deals with money paid or payable:
- Money paid before the frustrating event must be returned.
- Money payable ceases to be payable.
- The court can, however, allow the payee (the person who was due to receive the money) to keep or recover expenses incurred before the discharge, if it is just to do so (but the amount kept cannot exceed the amount paid/payable).
Analogy: You paid a £500 deposit for the hire of the hall. The hall owner spent £100 on cleaning supplies before the hall burned down. They must return the £500, but the court might allow them to keep up to £100 for expenses.
Section 1(3)
This section deals with Valuable Benefit conferred (given) by one party to the other, *other than* monetary payment.
- If one party gained a "valuable benefit" from the performance of the other party before the frustration, the court can order the benefited party to pay a "just sum" for that benefit.
- Example: Builders partly renovated a house before it was destroyed by a hurricane. The benefit conferred was the value of the completed work up until the hurricane (BP Exploration v Hunt (No 2) 1979).
Key Takeaway: Frustration is rare. It requires total impossibility or total pointlessness due to an unforeseen, external event, and the 1943 Act helps split the financial loss fairly.