Law 231 L 08

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

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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)

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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 non-
performance 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

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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 non-
breaching 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

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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:

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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.

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