Discharge, Frustration and Breach of Contract PDF

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Discharge, Frustration and Breach of Contract notes...

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Discharge, Frustration and Breach of Contract Performance 

The vast majority of contracts are performed correctly. However, failure to perform contractual obligations will entitle the other party to remedies (Photo Producation).

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Contracts can be discharged in 4 principle ways: 

A contract is discharged where the performance of both the parties complies fully with the terms the contract.

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The parties can agree to abandon or discharge the contract. o This requires further consideration from bother parties. o A condition subsequent may also be incorporated into the contract which allows the parties to discharge the contract on the occurrence of a stipulated event.

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A contract may also be discharged by the operation of law. For example, where it is frustrated.

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Finally, a contract is discharged where one party is in breach contract.

Frustration 

A contract is frustrated where, after the contract the contract is concluded, events occur which make the performance of the contract impossible, illegal or something radically different from what the parties had contemplated.

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The doctrine of discharge allows the courts to discharge the operation of the contract and bring it to an end automatically (Hirji Mulji v Cheong SS Co).

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However, the courts are reluctant to invoke the doctrine of frustration where the contract has simply become a bad bargain for one of the parties. (The Nema – Lord Roskill). 

Davis – C was contracted to build 78 houses for D at £94000 which was scheduled to take 8 months. However, due to labour shortages the work took an extra 14 months at a cost of £150000. The HoL rejected the argument that the contract had been frustrated.

Requirements of frustration: 

First, the very purpose of the contract must have become impossible, or at least radically different. This is illustrated by the comparison of 2 cases: 

Krell v Henry – D rented a flat from C in Pal Mall for the purpose of watching Kind Edward’s coronation procession. However, due to the King’s illness the coronation was cancelled and C did not use the flat. The HoL held that the contract had been frustrated as the cancellation of the procession deprived it of its commercial purpose.

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BUT Herne Bay Boat Co v Hutton – D rented a boat from C for the purpose of taking passengers to see the Naval Review for King Edward’s procession and provide day cruises for the passengers. However, the King fell ill and the procession was cancelled. The court held that this contract had not been frustrated because D had not been deprived of the commercial purpose of the day cruises.

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Secondly, the frustrating even must not have been ‘self-induced’ by the party seeking to rely on it. 

The Eugenia – D chartered a ship but was stuck in the Suez Canal. The court held that the contract was not frustrated because the charterers ran that risk themselves; they could have taken a safer, albeit longer route.

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Thirdly, frustration will not apply where the event was foreseeable, or ought to have been foreseeable, by the parties at the time of the conclusion of the contract. 

Walton Harvey Ltd – D granted C the right to display advertising on his hotel for 7 years. Before the 7 years had passed the local authority compulsorily purchased the hotel and demolished it. The court held that the contract was not frustrated because the compulsory purchase of the property was within the contemplation of D.

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The status of this rule was doubted by Denning LJ’s dicta in The Eugenia, but was affirmed by Rix LJ in The Sea Angel.

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Finally, the frustrating even must not have been provided for in the contract. Contracting parties often use force majeure clauses to exempt liability for acts of god, illness, extreme weather conditions etc. 

Met Water Board v Dick – D agreed to build a reservoir for C in 6 years. The contract stated that D should apply to the engineer for an extension of

time in the event of a delay ‘whatsoever or howsoever occasioned’. However, D was later forced to stop work and sell their plant because of a Government Order. The HoL held that the contract had been frustrated. The delay clause contained in the contract was intended to cover temporary difficulties, not such fundamental changes in the nature of the contract. Impossibility: 

Generally, a contract which has become impossible to perform will be frustrated. 

Taylor v Caldwell – D granted a license to C to use a music hall for a series of concerts. After the contract was concluded, the music hall burnt down and was unusable. The court held that the contract was frustrated because the destruction of the hall made performance of the contract impossible.

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Contract for personal service (employment contracts etc) are frustrated where the employee dies or become too unfit to work.

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Where the subject matter of the contract is unavailable for the purposes of the contract, it may be held to be frustrated. 

Bank Line Ltd v Arthur Capel – a charterparty was held to be frustrated where the ship was requisitioned and unavailable to the charterer.

Illegality: 

Supervening (after the conclusion of the contract) illegality can frustrate a contract.

 Fibrosa – D agreed to manufacture machines for C and deliver them to Poland. However, before the machines had been completed, Poland was occupied by the German army during WWII. The court held that the contract had been frustrated because during the time of the war it was illegal to trade with the enemy. 

Where the illegality is only temporary or partial, the contract will be frustrated only if the illegality affect performance in a substantial or fundamental way (Cricklewood Property Investments Ltd).

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Illegality is largely concerned with public policy consideration, particularly in ensuring that the law is followed.

The lease of land: 

The orthodox view was that a contract for the lease of land cannot be frustrated because land cannot be destroyed. However, the HoL has since rejected this view.

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National Carriers v Palalpina – C leased a warehouse to D for 10 years. After 5 year the local authority closed the only street which accessed the warehouse for 20 months. The HoL held that in the present case the contract was not frustrated. However, their Lordships did state that a contract for a lease of land could be frustrated in very rare circumstances.

Remedies for frustration: 

At common law the position is very strict. Only where there is a ‘total failure of consideration’ will the common law allow a Restitutionary remedy (Fibrosa).

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However, this has since been amended by sections 1(2) of the Law Reform (Frustrated Contracts ) Act 1943 and the Frustrated Contracts Act (NI) 1947. 

Moneys paid prior to the frustrating event are now recoverable.

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Sums payable prior to the time of discharge cease to be payable.

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The payee may be entitled to set off against sums which he paid before the discharge, in performance of the contract.

Breach of Contract 

Treitel – “a breach of contract is committed when a party without lawful excuse fails or refuses to perform what is due from him under the contact, or performs is defectively or incapacitates himself from performing.”

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The question of whether a breach has occurred depends on the precise wording of the contact. The BoP rests on the party claiming that the breach has occurred.

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Where a party enters into alternative obligations which are allegedly inconsistent with his existing contractual obligations, there will only be a breach where that party has made it genuinely impossible for himself to carry out his existing obligation (Alfred C Toepfer International).

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A breach of contract does not necessarily bring a contract to an end (as in Decro-Wall International). There are 3 possibilities open to the innocent party depending on the seriousness of the breach: 

Recovery of damages for the loss he has suffered in respect of the breach.

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Enforce his obligations under the contract.

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Termination of further performance of the contract.

Is the term in question a condition or a warranty? : 

A contractual term can be classified as either a condition or a warranty: each giving rise to different remedies in the event of a breach.

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A warranty is a term of lesser importance. A breach entitles the innocent party to damages only.

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A condition is a term of greater importance. Breach entitles the innocent party to damages and repudiation or damages and affirmation. 

A term is considered a condition if it goes to the root of the contract (Couchman v Hill).

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A term may be classified as a condition because there is already a binding authority on the matter. o A stipulation in a voyage charterparty relating to the time at which the vessel is expected to be ready to load was held as a condition (The Mihalis Angelos). o Timber described in the contract as half an inch thick was considered a condition when it was delivered at 9/16 of an inch (Arcos Ltd).

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The parties may also define the term as a condition within the contract. This must be done clearly and unambiguously (Lombard North Central plc v Butterworth).

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However, generally the courts have been reluctant to classify a term as a condition (Bunge Corp v Tradax Export SA).

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However, a distinct category of innominate terms exist which are neither conditions nor warranties (first identified in Hong Kong Fir Shipping Co Ltd per Lord Diplock). 

This gives the courts a large degree of flexibility as they will allow the party to terminate the contract only where the breach of the innominate term has had serious consequences for him.

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The Hansa Nord – C rejected the cargo delivered by D because it was not in ‘good condition’. However, the CoA held that the term which had been broken was not a condition, but an innominate term which did not give rise to

sufficiently serious consequences to terminate the contract. C was only able to sue for damages to reflect the loss in value of the cargo. Damages: 

Any breach of contract will give the innocent party the right to damages in respect of the loss suffered, unless this is excluded by an appropriately drafted exclusion clause. 

This is the case whether the relevant term is a warranty, condition or innominate term.

Enforcement of the contract: 

The party in breach may be unable to enforce the contract against the innocent party. 

Where the parties’ obligations are independent (one party’s obligations are not dependant on performance by the other party), the innocent party will be unable to abandon the contract (Taylor v Webb).

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Where the parties’ obligations are dependant, the innocent party must show that he is willing to perform his obligations before he can take an action against the party in breach

The right to terminate the contract: 

A breach of contract may entitle the innocent party to terminate future performance of the contract (repudiatory breach). 

This can only be relied upon where the term in question is a condition or an innominate term which gives rise to sufficiently serious consequences.

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It should be noted that a contract set aside in this way is set aside prospectively, not retrospectively (Johnson v Agnew). 

However, the breach of the primary obligation may give rise to secondary obligations (a distinction made by Lord Diplock in Photo Production) where all the benfits of the contract are substantially removed from the innocent party. These secondary obligations will give rise to an action for damages.

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However, the innocent party is not obliged to exercise his right to terminate performance of the contract. The breach merely gives him the option to do so. 

The innocent party is given time to consider this, during which time the contract is still in operation (Stocznia).

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The innocent party must communicate his decision to the other party if he wished to terminate performance (Vitol SA v Norelf Ltd).

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However, if the innocent party elects to affirm the contract, the contract remains in force and his decision cannot be revoked (Johnson v Agnew).

Anticipatory breach of contract: 

A contracting party may inform the other party, before the fixed time for performance has passed, that he will not perform his obligations. 

This allows the innocent party to terminate the performance of the contract immediately and claim for damages.

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Hochester v De La Tour – D agreed to employ C as a courier for 3 months from June. In May D wrote to C informing him that his services would no longer be needed The court held that C could make a claim for damages before the commencement of the contract (June).

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Again, the innocent party may elect to terminate performance of the contract Here, he must give reasonable notice to the party in breach.

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Similarly, he can elect to affirm the contract and demand specific performance. 

The innocent party may still continue with his obligations under the contract even where he knows this is not wanted by the other party (White and Carter).

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Although there is no general duty for the innocent party to act reasonably, where he acts “wholly unreasonably” (The Odenfield) or “perversely” (Isabella Shipowner) then the court may refuse to allow the party to continue with his obligations.

Case notes Vitol SA v Norelf Ltd [1996] AC 800: C contracted to sell a cargo of propane to D. The cargo was meant to leave before March 7, but on March 8 it was still being loaded. D communicated to C that it did not want to continue the contract because the cargo would no arrive on time. Nevertheless, the ship was loaded and sailed on March 9. Neither party did anything to further perform the contract. C sold the cargo to a third party at a loss and sued D for damages. The HoL unanimously held that D had communicated the repudiation to C and C’s failure to discharge his obligation was sufficient acceptance of the repudiation. C was therefore not entitled to damages (Lord Steyn providing the leading judgement).

White & Carter Ltd v McGregor [1962] AC 413: D supplied bins to the local authority, C. They contracted that they could advertise their garage on the bins for 3 years. However, on the same day, D wrote to C cancelling the contract. Nevertheless, C displayed the advertisements in accordance with the agreement and demanded full payment. The HoL held (Lord Keith and Lord Morton dissenting) that C was at liberty to ignore the repudiation of the contract and continue with its obligations. C was therefore entitled to full payment. Lord Reid noted obiter that this would not be the case if the person would have no interest, financial or otherwise, of performing the contract other than to impose a disadvantage on the other party.

Stocynia Gdynia v Bearbulk Holdings Ltd [2009] EWCA Civ 75: C entered into a contract with D to construct 3 vessels. However, the vessels were not delivered. The contract provided that C would be entitled to damages in the case of a delay and entitled to termination if D did not continue with the construction. C wrote to D terminating the contract but claimed for further damages for loss of bargain.

The CoA held that the provision in the contract which allowed C to terminate the contract did not prevent him from treating the contract as repudiated. C was therefore entitled to claim for further damages for loss of bargain.

The Super Servant Two [1990] 1 Lloyd’s Rep. 1: D agreed to transport C’s oil rig from Japan to Rotterdam. Under the terms of the contract D was allowed to transport the cargo using either Super Servant 1 or Super Servant 2. However, SS2 had sunk. D argued that the contract had been frustrated on the grounds of impossibility. C argued that the impossibility was self-induced and the contract was not frustrated. The CoA held that D could not rely on the doctrine of frustration because they had brought the impossibility upon themselves (Lord Bingham)....