Law - 11 Discharge of contract PDF

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CONTRACT – DISCHARGE (Pg 179)Discharge = termination of a contract. After a contract is discharged, the parties are relieved of their obligations under the contract. There are four ways à Performance, Breach, Agreement and Frustration.Performance (Pg 180 )Performance – discharging a contract by perf...

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CONTRACT – DISCHARGE (Pg 179) Discharge = termination of a contract. After a contract is discharged, the parties are relieved of their obligations under the contract. There are four ways à Performance, Breach, Agreement and Frustration.

Performance (Pg 180) Performance – discharging a contract by performing all obligations as stipulated in the contract. Precise Performance = perform all their obligations fully & precisely Cutter v Powell (1795) pg 180 - payment conditional upon completion of voyage, and since Cutter did not complete the voyage; even part payment may not be made – very harsh.

Exceptions to the Precise Performance Rule (Pg 180)

Re Moore & Co and Landauer & Co (1921)pg 180 - buyer lawfully entitled to reject shipment on the basis of less than full & precise performance.

Over the years, the courts have acknowledged that this rule of full & precise performance, if applied strictly, may cause unfairness. Here are the exceptions to this rule: If deviation in performance microscopic = contract deemed to have been performed fully & precisely. i.e. entitled to full payment. What is microscopic depends on the facts of the case. De minimis rule Acros Ltd v E A Ronaasen & Sons (1933) pg 181 - Although staves were of merchantable quality & could be used to manufacture cement barrels, contract was breached because staves did not correspond to description of the goods (the staves were too thick). Contract may be viewed as several independent/divisible obligations - Viewed as several sub-contracts that can be discharged separately eg Employment Contracts. Divisible contracts - Cutter v Powell (1795) – this unfair outcome can be avoided.

The promissor has substantially performed obligations under contract, able to claim full payment less any amount necessary to make good the defect. Boone v Eyre (1779) - According to the principle in the case, where a promisor has substantially performed his obligations under a contract, he can claim the agreed payment, less the amount necessary to make good the defect. Two cautionary remarks – 1. IF contract is an entire obligation (as opposed to divisible obligations) & payment is made conditional upon performance of entire contact, then the promisor may not be able to invoke substantial performance to claim payment. (as opposed to a divisible one) Substantial performance

Bolton v Mahadeva (1972) pg 182 - The court of appeal refused to grant Bolton compensation on a quantum meruit basis because it held that the use of the word lump sum suggested that the contract was an entire one. An entire contract requires precise performance to discharge, so Bolton received nothing since the central aircon failed. Doctrine of substantial performance did not apply because of the nature of defect and proportion of cost to cure the defects (30%). Hoenig v Isaacs (1952) pg 182 - The Official Referee held that this was not an entire contract. Further there was substantial performance although there were some defects. Hoenig was entitled to receive the amount less the cost of rectifying the defects. 2. Practical problem of determining what exacts to ‘substantial performance’. The degree of completion required would again depend on the facts of the case.

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Prevented performance

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Promisor may claim payment that is commensurate with the obligations performed on the basis of quantum meruit.

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Planche v Colburn (1831)pg 183 It was held that Planche was entitled to reasonable remuneration based on quantum meruit because the contract was discharged by Colburn’s action in abandoning the project. Voluntary acceptance of promisor’s partial performance by promise can discharge the contract. Promisor can claim for reasonable remuneration on quantum meruit basis under the law of restitution: Empresswood Enterprise Pte Ltd v Kao Shin Ping (2005) pg 183 HOWEVER, the promisor may still be liable to the promisee in a claim for damages for his partial performance of the contract. - Sumpter v Hedges (1898) - Court did not allow Sumpter’s claim because Hedges did not have a clear choice of accepting or rejecting it. It was on his land, so Hedges had no choice but to accept this partial perfromance. In other words, promisor cannot leave the promisee in a limited and unfavorable position due to his partial performance. Otherwise, he would be able to claim partial performance.

Acceptance of Partial Performance by promisee

Promisor performed part of his obligations but prevented by other party from performing remaining obligations à the contract treated as discharged on basis of prevented performance. PROMISOR may sue for breach of contract

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Breach (Pg 183) – 2 types of Breach (Actual & Anticipatory) A breach of contract occurs when: 1. There a clearly a condition breach 2. There is clearly agreed within the parties that it is a warranty breach, but because consequences are so serious, apply the exception in RDC case, breach would be repudiatory 3. There is an innominate term breach, apply the HK FIR test, if the injured party is deprived of substantially the whole benefit that was intended to be received, the breach is considered repudiatory 4. Total failure of consideration 5. Fundamental breach = breach in the fundamental purpose of the contract as intended when the contract is made (root of the contract) 1,4,5 are automatically repudiatory 2 & 3 will require the case to be brought to court for judge to determine the outcome and whether it is repudiatory Actual Breach When the time for performance of the obligation has arrived, the Promisor fails to perform it. When the time for performance of obligation has not yet arrived, the Promisor, by words or Anticipatory Breach conduct, clearly expressed his intention not to perform the obligation. -

Not every breach of contract results in the contract from being discharged. For the breach to result in a discharge of the contract, the breach has to be repudiatory breach

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If it is non-repudiatory breach, the innocent party can only sue for damages, and the contract remains on foot.

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In all cases of breach, actual or anticipatory, repudiation must be unequivocal (clear). An honest misapprehension as to one’s obligations under a contact which leads to non-performance would not amount to repudiation if there is underlying willingness to correct one’s understanding and fulfill those obligations. -

Mersey Steel and Iron Co v Naylor Benson & Co (1884)pg 188 – No repudiation because Mersey Steel was under a genuine misapprehension that they should not pay for the shipments.

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Wong Poh Oi v Gertrude Guok and Another (1966) pg 188 – Mere non payment of an installment or breach of one term does not necessarily put an end to a contract. The defendant’s purported repudiation was wrongful.

For an Actual Breach to be a Repudiatory Breach, it must either: 1. Breach of condition - Behn v Burness (1863) pg 184 2. Fundamental Breach [breach goes to the root of the contract] – When the fundamental purpose of the contract is not met. The fundamental purpose of contract is what BOTH parties contemplated it to be, not contractual intention of just one party. Logically, it would also deprives the innocent party of substantially the whole benefit which it was intended to confer. - Hong Kong Fir Shipping Co Ltd v Kawasaki Kaisen Kaisha Ltd. Pg 184 and 123 3.

Performance of obligations outside the time limits specified in the contract can amount to a fundamental breach. - Tate & Another v Sihan Sadikan (1992) pg 185– failure to produce & pass title on time was fundamental thus plaintiffs entitled to recover their payment.

For a Anticipatory Breach to be a Repudiatory Breach: - the threatened non-performance must have the effect of depriving the other party of substantially the whole benefit which the contract was intended to bestow on him. -

Hochster v De La Tour (1853)pg 186 – De La Tour’s letter constituted a repudiatory breach entitling Hochster to sue prior to contracted date & claim damages.

Effects of Anticipatory Repudiatory Breach Innocent party has choice either to: 1. Accept breach > K discharge 2. Affirm K > wait until performance date and K contracts (treat no show date as the date of actual breah) Howeard v Pickfoar (1952) - “An unaccepted repudiation is a thing write in water” you must accept the breach and communicate this intention to the other party

Effects of Actual Repudiatory Breach: - Breach of condition or fundamental breach à Entitles innocent party to sue for damages & discharge/terminate the contract -

OR he may choose to affirm the contract so that it remains on foot. He can also claim for damages. [See Election below].

Effects of Non-repudiatory Breach: - Breach of a warranty or non-serious breach of an innominate term à Only entitles innocent party to sue for damages & contract NOT considered as discharged. When a repudiatory breach is present, contract not automatically discharged. Innocent party can choose to either: - Accept the repudiation à acceptance of repudiatory breach & treat contract as discharged à claim damages to put him into the position as if the contract has been performed properly Hong Fok Realty Pte Ltd v Bima Investment Pte Ltd (1993) pg 189 Affirm the contract à contract remains on foot à innocent party still retains the right to claim damages for the breach. In both cases, innocent party must communicate choice to other party.

Election (Pg 187)

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In affirming under anticipatory breach, two points should be noted: 1. Innocent party risks contract being frustrated in future if a supervening event occur. Avery v Bowen (1855) pg 190 – Bowden’s liability for anticipatory repudiation relieved by war which frustrated the contract. 2. Right to affirm contract requires innocent party to have legitimate interest. In absence of legitimate reasons, innocent party must accept the anticipatory breach, treat the contract as discharged & claim damages. Clea Shipping Corporation v Bulk Oil International, “The Alaskan Trader” (1984) pg 190. Rationale is if damages would be a sufficient compensation, he should not be permitted to perpetuate the contract which may result in greater detriment to the defaulting party.

Discharge of Agreement (Pg 190) Existing Agreement

A contract may include a term that it would be discharged upon occurrence of a stipulated event or at expiration of a certain period. - E.g.: - IPO that may include a term that the contract is deemed discharged if STI falls below 1.500. - A tenancy agreement will have a specified date on which it will end. However, there might be certain statutory provisions which might modify the right of parties to discharge a contract by agreement. Eg. The Employment Act, specifies the minimum periods given by employers to different types of employees in cases of termination. A contract may be discharged by parties: - entering into a fresh agreement to extinguish earlier contract, or - contract terminated as a result of common intention of parties that it should no longer bind them Mutual When the contract is partially or entirely executory, the parties may execute a mutual Release release which discharges each party from all their obligations under that contract. Unilateral 1 party who performed all his obligations discharges the other party who has not Release performed all his obligations by executing a release in the form of a deed, so that no consideration is required Accord and When one party purchases his release with fresh valuable consideration provided to Satisfaction the other party, the understanding to do so is the accord and the consideration provided is the satisfaction. This discharges the earlier contract.

Variation Subsequent Agreement Waiver of Rights

“Settlement” for a contract that was partially performed. Contractor was paid less in exchange for forbearance not to be sued for breach of contract. Contract altered by a subsequent agreement, supported by fresh consideration. Depending on the case, the contract may be discharged entirely or amended by the subsequent agreement. Where one party, at or without the request of the other party, voluntarily grant the other party an indulgence not to perform an obligation under a contract without consideration passing, the first party has been given a waiver. Usually given in respect of specific modes of performance but not usually in respect of the whole contract. Leivest International Pte Ltd v Top Ten Entertainment Pte Ltd (2006)pg 192 Leivest did not exercise its rights when Top Ten failed to pay the costs and interest on time but accepted Top Ten’s delayed cheque payment. The acceptance had “waived” the breaches, and it cannot resurrect them. This is despite the fact that Top Ten has breached the contract E.g.: an employee consistently late. Employer can prevent by including the clause “no waiver unless in writing” in the employment contract. – The employee can argue that the employer voluntarily grant him an indulgence to come late. So the employer can include that clause to prevent this.

Discharge by Frustration (Pg 192) Discharge of a contract by occurrence of a supervening event, for which neither party is responsible - Drastic change in circumstances or unforeseen situation that happened - Both parties are not responsible - Caused one party to be unable to meet the main objective of the contract (basis/root) intended at the time of contract - Radical change of circumstances, different from what was initially intended Self-induced harm cannot amount to frustration and the party is responsible for his acts. If the party could have made precautions to avoid the loss, it also cannot amount to frustration. Only when the party is unable to do anything or has done everything that was possible to prevent the loss, then it can amount to frustration. Davis Contractors Ltd v Fareham Urban District Council (1956) – HOL rejected appellant’s claim as cost increase did not alter situation so much that task undertaken was radically different from what was originally contemplated. Note: Supervening event + Not parties fault + Radical change in circumstances = Frustration When Frustration operates: - Frustration does not require impossibility of performance, although impossibility of performance may give rise to frustration. - Impracticability caused by extreme or reasonable difficulty, expense or injury may be sufficient to trigger frustration. The types of Frustrated Contracts are: Destruction Subject matter of contract destroyed due to no fault of parties. of subject

matter

Taylor v Caldwell (1863) pg 194 The hall [subject matter] was destroyed and the court held that the contract was discharged by frustration. Event which is subject matter of contract cancelled/postponed due to no fault of parties. Real issue is whether the event which failed to occur, could reasonably be considered to be one which both parties hold to be the very basis of the contract such that if the event did not take place, the parties would not have contemplated entering into the contract in the first place.

Nonoccurrence of event

Krell v Henry (1903) pg 194 – Once the coronation was postpones, the purpose for which the flat was rented was vanished. Herne Bay Steamboat v Hutton (1903) pg 194 – The Court of Appeal held that the contract was not frustrated. One reason was that a tour of the fleet was still possible although the naval review was cancelled. Unexpected government action or ruling preventing performance of contract.

Government Interference

Factors Limiting Frustration (Pg 196)

Personal Incapacity

Metropolitan Water Board v Dick, Kerr & Co. (1918) pg 195 – The contract was frustrated. Lim Kim Som v Sheriffa Taibah bte Abdul Rahman (1994) pg 195 – Court of Appeal agreed & held that the contract was frustrated. Opposite Case: Oakwell Engineering Ltd v Energy Power Stationo Systems Ltd (2003) pg 195 -Payable tariffs were unilaterally reduced by the Government of India. However, insufficient to frustrate the contract. Defendant had already assumed the risk under the agreement and the plantiff’s claim for breach was allowed. Contract for personal service frustrated when personal incapacity affects performance of contract in a fundamental way. Possard v Spiers v Pond (1876) pg 196- Contract was frustrated because she had fallen ill. Personal incapacity which affects the performance of such a contract in a fundamental way will frustrate the contract à Lau Lay Hong v Hexapillar Pte Ltd (1993). Pg 196 Contract for personal services = contract for services of a particular person. Contract for services is one where the subject is the services specified, does not matter whether or not they are provided by a particular person. More foreseeable event, less likely event will be held to frustrate a contract – rationale is that the more foreseeable the event is, the parties can be expected to have provided for it in their contract. However, mere foreseeability of the event is no bar to frustration.

Foreseeability

Housing & Development Board v Microform Precision Industries Pte Ltd (2003) pg 197 The fact that the defendants had been aware of the problem for a long time. This go against the doctrine of frustration which requires an unforeseen contingency to occur after a contract is made, and is due to neither party’s fault, and thereby rendering the contract incapable of performance. In this case, it is not an unforeseen contingency and hence does not constitute frustration.

Clauses that expressly provide for occurrence of events which will normally fall within class of events leading to frustration eg. war, natural disaster. Effect of such a clause depends greatly on its construction. If the clause is construed as a complete provision fully governing the situation which has arisen, then it would be effective to prevent frustration from arising. There will also be no breach of contract despite its non-performance.

Force Majeure Clauses

General principles of Force Majeure Clauses: 1. Purpose is to contractually allocate the risks of specified future events between the parties 2. Precise construction is crucial in order to determine its scope 3. May exclude frustration and provide discharge or other relief for non-frustrating event 4. Doctrine of frustration would still be effective to determine how these obligations should be treated due to an unforeseeable event; such clauses by their very nature and function would usually meet the criteria required of the doctrine 5. Parties are free to exclude the doctrine 6. A party who relies on Force Majeure Clauses must not only act within the clauses, he must also take reasonable steps to avoid and mitigate results China Resources (S) Pte Ltd v Magenta Resources (s) Pte Ltd (1997) pg 200– Force majeure clause applied & the USSR embassy letter was ‘next best thing’ & therefore adequate evidence of the force majeure. If a FMC turns out to be an exemption clause, it would be subjected under UCTA. Examples of FMC: a) include events leading to frustration & events not leading to frustration b) progress payment c) exclusion of liability d) optimal solution = both parties discharged, further payment not payable & work done before frustration must be compensated No frustration if it is self-induced, i.e.: No Frustration if it is the result of voluntary action of one of the parties.

Self induced frustration

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Effects of Frustration (Pg 201)

Under a) b) c) d)

Maritime National Fish v Ocean Trawlers (1935) pg 200– The privy council held that the unavailability of a license was due to the allocative decision of Maritime National.

Similarly in J Lauritzen AS v Wijsmuller BV, The Super Servant Two (1990) Frustration automatically discharges a contract (Unlike repudiation which must be ac...