CONTRACT LECTURE 11 C STRICKLAND Total time = 48 mins 21 secs
DISCHARGE OF CONTRACT
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This lecture concerns Discharge of Contract.
Discharge of the contract relates to how the contract comes to an end.
A contract may come to an end by virtue of:
i.performance
ii.agreement
iii.breach or
iv.operation of law, especially by frustration
In this lecture we concentrate on the all the above methods apart from frustration that is such a big topic it will be dealt with separately.
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First then, a few notes on how Performance brings a contract to an end.
Most contracts come to an end by the very fact that both sides have performed what they agreed to perform – though performance must be precisely in accordance with the terms of the contract, both express terms and implied terms. It is only the minority of contracts where something goes wrong.
Thus, in a sale of goods, the one side pays for the goods, the other side hands over the goods, and if the goods are of satisfactory quality and so forth, then the contract is performed.
In a contract for the supply of services, one side pays for the service the other carries out the service and if all is well, the contract is performed.
Failure to comply with the terms implied into contracts under the Sale of Goods Act 1979 and the Supply of Goods and Services Act 1982 will mean that performance has not been achieved.
Before looking at how agreement discharges a contract, we should note the difference between ‘entire’ and ‘severable’ obligations under a contract.
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First, we shall look at
Entire obligations
Most CONSUMER CONTRACTS give rise to an ‘entire’ obligation on the business person to perform his side of the contract, usually, though not always, for a lump sum payment at the end. Thus, unless the entire contract is performed, the consumer does not have to pay anything. This is based on the case of Cutter v Powell 1795. A sailor was hired for a voyage from Jamaica to England. He died before the ship reached England and the widow sued for payment for his services before he died. She lost. The contract was held to be one of an ‘entire obligation’ – to serve for the whole voyage and so she couldn’t claim for part of the voyage.
This rule may seem harsh when applied to business people, for instance, when they have done quite a bit of work for the consumer eg. installing central heating or double glazing or doing other building work on a house, but not finished. It means they can’t get payment if the job is seen as one for an ‘entire’ obligation. But, without the rule, consumers would have scant protection against rogue business people and it encourages the business person to finish the job once started.
However, there are 2 ways in which the harshness of the rule may be mitigated:
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First, where the innocent party [the consumer] has a CHOICE to accept the work done and does so
Although the business person may be in breach of contract for not fulfilling his entire obligation under the contract, quite often the consumer will be left with something eg. half fitted double glazing, a partially built extension or partially fitted central heating. In these circumstances can the builder/plumber claim payment for the ‘benefit’ thus left with the consumer?
The answer is that they can claim payment for the benefit left ONLY if the consumer has a REAL CHOICE as to whether to accept the work done so far or not. If the consumer has no real choice then the business person cannot claim any payment at all.
Thus, in Sumpter v Hedges 1898 although the builder had half finished his contract to build 2 houses on the other’s land before he abandoned the project, he could not get payment for the building work. The half built houses were on the other party’s land and could not be knocked down and returned to the builder in any meaningful way. However, since the landowner had used building materials left on his land to finish the houses, the builder could claim the cost of these materials. The landowner did have a choice as regards the materials – they could have been returned to the builder.
And in Bolton v Mahadeva 1972 there was a contract to install central heating for £560. It was installed but was defective – it never really got hot and gave off fumes. The plumber would not put it right. He was not entitled to any payment for the work he had done because the consumer had ‘no choice’ but to accept the work already done.
Thus, for most consumer contracts concerning home improvements, such as double glazing, central heating, building works, the consumer has the power to refuse payment following breach of contract even when a lot of work has been done.
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Secondly, the harsh rule of Cutter v Powell 1795 may be avoided where the party in breach of a contract regarded as an entire obligation contract is only ‘slightly’ in breach
If the party in breach is in fact only guilty of a ‘trivial’ breach of contract, the court may allow him to recover payment for the ‘substantial’ part of the job done. In Hoenig v Isaacs 1952 there was a contract to decorate and furnish a flat. On completion of the work the decorator was owed £350 but the defendant refused to pay it saying that the contract was for an ‘entire obligation’ and some of the work was defective ie. breach of contract as regards completing the work with reasonable skill and care. However, since the defects were only TRIVIAL and would only cost £55 to put right, and the total cost of the contract was £750, the decorator could get the additional payment minus the £55 ie. £295.
Note, that this only applies to TRIVIAL defects from the contract obligation – so in the Bolton v Mahadeva case, the breach was TOO SERIOUS to let the plumber get any money.
Beatson notes, in ‘Anson’s Law of Contract’, 27th edition, page 547, that:
‘Entire obligations are, however, the exception rather than the rule. The obligations in most bilateral contracts are “divisible” in the sense that the breach of any one or more of them will not necessarily constitute a ground for discharge... A failure by one party precisely to perform its obligations under the contract will give a right of action in ‘damages’ to the other; but it will not necessarily “discharge” the innocent party from the performance of its own obligations under the contract.’
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Severable obligations
This mainly applies to ‘commercial’ contracts where payments are made in instalments in relation to various stages of performance. Usually breach of performance on one stage just relates to that stage and does not result in breach of the whole contract. See Regent OHG Aisestadt v Francesco of Jermyn Street Ltd 1981.
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We can now make a few comments on discharge of contract by Agreement.
The parties to a contract may end the contract by agreeing to do so. To ensure that this agreement is legally binding the parties must make it enforceable by showing consideration for it. If both still have obligations under the original contract, the consideration is that they both suffer detriment by these obligations not being performed. If one side has completed his side of the bargain but the other has not, then either some extra consideration must be provided for the agreement to end the contract or it will have to be effected by ‘deed’ where no consideration is required. Although the parties could just agree to end the original contract with no further agreement, this could be risky if one party then alleges that the other has not performed the original contract. Thus, it is prudent to end a contract by agreement by the creation of a second legally binding agreement to this effect.
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We can now move on and consider how a contract is discharged by a Breach of contract
A breach of contract is where one side either:
-fails to perform his obligation under a contract as discussed above, unless of course
that side has a lawful excuse such as frustration; or where one side
-refuses to perform his obligations under the contract or where one side
-performs his contractual obligations defectively eg. without taking
reasonable care and skill or providing goods of an unsatisfactory
quality or not performing in the time frame for the contract
The effect of the breach of contract depends on whether the term breached is a condition, warranty or innominate term.
It must be noted that there are no ‘general’ principles regarding how to establish a breach of contract. It is up to the party alleging the breach of contract to show that it has in fact been breached. This will obviously depend on a close analysis of the actual terms in the contract, both express and implied.
It is also worth noting that usually the degree of fault of the person in breach of contract is irrelevant, that is, once a contract is breached according to the terms of the contract, it is breached. In this sense liability is often said to be ‘strict’. However, if the terms of the contract that are alleged to be breached relate to the performance of services, then liability is not strict in that sense. Here, it is often necessary to show that the party who is alleged to be in breach has not performed the service ‘with reasonable care and skill’. This may be an implied term, for instance, under section 13 of the Supply of Goods and Services Act 1982.
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Where a condition is breached ( because the term goes to the root of the contract) the breach is said to be REPUDIATORY. This entitles the innocent party to either:
Terminate the contract or
Affirm it.
If the innocent party decides to terminate the contract this applies only to future obligations remaining under the contract. He can claim damages for the breach but the contract is not regarded as terminated from the moment it was made. The amount of damages has to be decided in the light of the terms in the contract which means that the court has to take account of any exclusion clauses in the contract. It may be that an exclusion clause exempts the party in breach from liability for the breach.
The innocent party may however decide to affirm the contract which means that both sides will have to continue to perform the contract. The innocent party can still claim damages for the breach as this is the ‘secondary obligation’ that comes into play following breach.
Thus, only where there has been a breach of condition plus a decision to terminate the contract by the innocent party does breach of a condition actually ‘discharge’ the contract.
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Where a warranty is breached (because the term is not as essential to the contract) the breach is not repudiatory and so the innocent party can only claim damages. Thus, when the term breached is only a warranty, the contract is not actually ‘discharged’ – the contract remains in force.
Where an innominate terms is breached if the effect of the breach is serious then the breach is said to be repudiatory and the innocent party can elect to terminate or affirm the contract and claim damages. If the effect of the breach is less serious, it is not repudiatory, and the innocent party can only claim damages
It can be seen that the effect of a term being classified as a condition gives the innocent party greater rights than if the term was classified as a warranty.
A term in a contract may be classified as a ‘condition’ either by:
-an Act of Parliament eg. Sale of Goods Act and Supply of Goods and Services Act
-by the courts
-by the parties themselves
If the parties use the word, ‘condition’ in the contract, the court is likely to say the term was a condition, but this is not conclusive.
A case to show this is L Schuler AG v Wickman Machine Tool Sales Ltd 1974. This case concerned an agreement between Schuler and Wickman. Schuler gave Wickman the sole right to sell Schuler products in a certain territory that included the UK. Schuler wanted to ‘terminate’ the contract because Wickman did not carry out the term in the contract, under clause 7 (b) that they were to visit the named 6 firms at least once a week to promote sales for the duration of the contract that was stated to be from 1963 to 1967. Schuler contended that 7 (b) was a ‘condition’ of the contract that allowed them to repudiate the contract because 7 (b) actually had the words in it, ‘It shall be a condition of this Agreement that …’ Remarkably this case progressed from arbitration through the High Court and Court of Appeal to the House of Lords on this very point. The House of Lords upheld the decision of the Court of Appeal that despite the words ‘it shall be a condition….’ Clause 7 (b) was not a condition of the contract in the sense that allowed repudiation. The reasons were that the contract as a whole was so badly drafted and that there was a lot of confusion over the interplay between clause 7 and 11.
However, in a well drafted contract, the use of the word ‘condition’ can give rise to the right to repudiate for breach.
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If the parties do not specify the status of the term, the courts may decide that it is an innominate term to give themselves more flexibility and so as not to be too harsh to the party in breach. They try to work out what must have been the ‘intention’ of the parties when the contract was made. In some areas of trading, it has become established what type of term certain terms are despite lack of explicit statement to this effect in the contract. The classic example is for terms as to ‘time’.
For ‘commercial’ contracts, it is generally accepted that stipulations as to time of performance are regarded as very important, as conditions, and breach of a time stipulation is regarded as a repudiatory breach. Although in Torvald Klaveness A/S v Arni Maritime Corporation, The Gregos 1994, the majority of the House of Lords held a time term in a commercial contract to be an innominate term. This may not be desirable since in commercial dealings businessmen and women like ‘certainty’ in their dealings and regarding a time term as innominate breeds uncertainty.
In ‘non-commercial’ contracts a time term is not normally regarded as a condition unless it is expressly stated to be such by the parties. See United Scientific Holdings Ltd v Burnley Borough Council 1978.
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So far we have looked at how a breach of contract may occur by:
i.non performance, or
ii.defective performance, including ‘late’ performance
Now we need to briefly look at the situation where one party states ‘in advance’ that they are ‘not’ going to perform the contract – ie. anticipatory breach.
The leading case is Hochster v De La Tour 1853.
The defendants had made a contract to employ the plaintiff as a courier from 1st June 1852 onwards. However, in May they told the plaintiff they no longer needed him and so the plaintiff sued them for breach of contract. He succeeded without having to wait until the actual start date for the contract. He was entitled to an immediate remedy because of an implied term in the contract that between the date the contract was made and the start date of the contract, neither side would do anything to prejudice the contract that had been made.
An anticipatory breach is usually made EXPRESSLY by the side not wanting to go ahead with the contract, by words. However, it can also be effected by unequivocal conduct.
When there has been an anticipatory breach of contract, damages will be payable from the date of breach without having to wait for the start date of the contract.This is because the contract is subsisting as soon as it is made – actual commencement of performance under the contract is for the future, but the contract has been made and so where one side declares their clear intention not to perform in the future, this is a breach of the contract.
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An interesting case to consider in relation to breach of contract and its effects, is Photo Production Ltd v Securicor Transport Ltd 1980. We previously mentioned this case when looking at exclusion clauses and fundamental breach and noted that an exclusion clause may relate to fundamental breach leaving it up to the court to decide, on a matter of construction, whether or not the breach is covered by the exclusion clause. These points will be discussed in further detail here as well.
First, let us look at the facts in this case.
Photo Productions Ltd owned a factory and entered into a contract with Securicor Transport Ltd, a security firm, for the latter to provide security services for the factory. The factory was destroyed by a fire and the loss totalled £615,000. The question was whether or not Securicor was liable to Photo Productions for this loss.