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Discharge

Previous: Contractual terms

Introduction

The discharge of a contract means that it is bought to an end. For most contacts, this is done by both parties fulfilling their obligations. However, a contract may also be discharged in other ways. Where there is a common mistake, a contract is never made, and where a contract is frustrated or breached in a repudiatory manner, it may be discharged prematurely.

Common mistake

Where parties to a contract are both mistaken in some way before the contract is concluded, the contract may be void, that is it is treated as if it never existed. This is different to frustration, which can only occur after conclusion.

The case of Bell & Lever Bros [1932] is a good illustration of how the doctrine of common mistake operates. As a brief background, Bell and another person named Snelling were employed by Lever Bros to run and make profitable a company. They successfully did this, and once Lever Bros was satisfied that their objectives had been completed, both Bell and Snelling were made redundant with huge payoffs to say thank you. However, shortly after paying this money, Lever Bros discovered that prior to the redundancy contracts being finalised, Bell and Snelling had both engaged in some personal trading, which had been expressly prohibited by their employment contracts. If Lever Bros had known this before, Bell and Snelling could have dismissed without any payoff. They therefore sought to recover the payoff sums. In legal terms, they sought to void the termination contracts due to common mistake. The court refused to void the contract as although there had been a mistake, the profits made by Bell and Snelling’s personal trading had been so small in comparison with the profits they had made for Lever Bros, the mistake was not an “essential and integral element of the subject matter of the contract”. This seems like the just outcome.

In Couturier v Hastie [1856], a contract was voided where common mistake was claimed as the mistake was to the existence of some corn, which had deteriorated in transit. By ‘not supplying’ any goods, there had been a total failure of consideration; nothing had been done in performance of the contract. Although, in McRae v Commonwealth Disposals Commission [1951], a contract which sold a non-existent shipwreck was not voided where liability for non-existence had been provided for in the contract, meaning damages could be awarded instead.

One type of situation in which a contract will not be void for common mistake is where there is a mistake in quality. This is because the courts wish not to allow contracts to be voided because the claimant entered into a bad bargain. In Kennedy v Panama [1867], shares could not be refunded just because a company which expected to get a contract did not get it. Although, in Sheikh Bros v Ochsner [1957], a contract was voided where some land could not provide the requested yield: both parties were mistaken. The corn in Couturier v Hastie [1856] had deteriorated to such a point that it had gone beyond a change in quality to effectively non-existent.

A contract will be void for common mistake if a mistake is made with regard to the lawfulness of performance. In Solle v Butcher [1950], it was illegal to charge a £140 per year rental fee. The contract was void (exceptionally) on certain terms even though the tenant had agreed to pay £250 per year.

The case of Great Peace Shipping v Tsavliris Salvage [2002] summarised what a common mistake is in a case which again was not void as there was only a change in quality of performance. The case said that for a common mistake to make a contract void, there must be a common assumption made with no warranty or fault. The performance of the contract must be impossible and the mistake must be fundamental to the contract.

Frustration

Introduction

Whilst a common mistake voids a contract retrospectively, frustration only discharges a contract prospectively, i.e. going forwards and not looking at past events. Prior to the introduction of the doctrine, unforeseeable events led to harsh contractual realities. In Pardine v Jane [1646], a tenant was evicted, but still had to pay rent while not using the house. Taylor v Caldwell [1863] introduced the doctrine. An agreement had been made to provide a venue for a event. However, prior to the event, and not due to the fault of either of the parties, the venue was burned to the ground. It was said that the contract had been discharged as its purpose had been frustrated. There was no liability despite the fact that an implied term that the venue would exist at the time of the event had been breached.

The difference between common mistake and frustration can be illustrated by the juxtaposing cases of Griffith v Brymer [1903] and Krell v Henry [1903]. In both cases, a hotel room was booked for the purposes of viewing a royal march. However, the march was cancelled. In Griffith v Brymer [1903], the march had already been cancelled when the room was booked, but not to the knowledge of either of the parties. The contract was therefore void for a common mistake as to the existence of the march and the money paid had to be returned. Conversely, in Krell v Henry [1903], the room was booked prior to the march’s cancellation. The contract was therefore frustrated by the intervening event of the cancellation. As frustration is only prospective, the deposit paid for the room did not need to be refunded.

Fundamental change in performance

Frustration therefore discharges a contract prospectively. But what is a frustrating event? A frustrating event is one which changes the subject matter of the contract, or in other words, causes a fundamental change in performance. Just as with common mistake, an event is not frustrating if it only changes the quality of possible performance. This was the case in Tamplin Steamship v Anglo-Mexican Petroleum [1916] where a ship was requisitioned. Some of the contract could still be performed, therefore there was no frustration. In Jackson v Union Marine Insurance [1874], a contract was frustrated are repairs took an unreasonably long time to complete. However, in Davis Contractors v Fareham UDC [1956], there was no frustration where, due to a lack of labour, performance took 22 months rather than 8. The performance was not of a different kind. The case required that obligations prior to a ‘frustrating’ event were compared with obligations after the event in order to decide whether they were so radically different that the contract should be frustrated.

Other examples of cases involving frustration are Herne Bay Steamship v Hutton [1903], which involved a failed claim to frustrate a contract as a display was cancelled (the ship could be used for other purposes than to view the display), and Taskiroglou v Noblee Thorl [1962], where a contract was not frustrated as despite the closure of the Suez Canal, delivery was still possible and the carried goods would not deteriorate. The Sale of Goods Act 1979, s 7 provides that an agreement is voided if goods perish before delivery.

Limitations of frustration

There are a few circumstances in which a contract may in no scenario be frustrated.

The first limitation is where the risk of such an event has been foreseen. In Bank Line Ltd v Arthur Capel [1919], this was the risk of a ship being requisitioned, and in Metropolitan Water Board v Dick, Kerr & Co [1918], this would have been the event of a delay had the delay not been permanent (the contract was voided where a reservoir building contract was cancelled). Where the event is provisioned for, the contract will not be frustrated.

The second is where frustration is self-induced. In Maritime National Fish Ltd v Ocean Trawlers [1935], a contract was not frustrated where the charterers chose not to apply a licence to a ship which was being chartered.

The third is where performance is still possible, a point illustrated by The Super Servant Two [1989]. It would have been perfectly possible for a ship owner to provide the other of his two ships to a charter after one sank. It was irrelevant that he would have had to breach another charter-party to perform.

Finally, policy will oust the doctrine of frustration, which may mean that a contract is frustrated anyway. In Ertel Bieber v Rio Tinto [1918], policy prevented a contract from being performed, and in The Eugina [1964], a contract was not frustrated just because the Suez Canal could not be entered because it was in a war zone. The difference in time to deliver was not radical.

Consequences of frustration

As per Joesph Constantine Steamship Line v Imperial Smelting Corp [1942], frustration prospectively discharges both parties from a contract. This means that deposits already paid, such as £100 in Chandler v Webster [1904] are not recoverable. This has led to some harsh results, such as in Appleby v Myers [1867], where machinery had been delivered and mostly installed before a fire broke out. No money had been paid to the providers and installers. Under common law, deposits are only recoverable where there has been a total failure of consideration. That is, one party has not performed at all. In Fibrosa Spolka v Fairbairn [1943], machinery was not delivered so deposits paid were recoverable. The principle of a total failure of consideration was introduced by Whincup v Hughes [1871].

The Law Reform (Frustrated Contracts) Act 1943 has now been introduced though, so that some recovery may be permitted, making frustration not entirely prospective.

  • s 1(2) – Allows the recovery of money already paid with the exception of expenses at the court’s discretion. In Gamerco v ICM/Fair Warning Agency [1995], expenses were recoverable where a stadium destined to be the venue for a Guns ‘N’ Roses concert was ruled unsafe.
  • s 1(3) – Allows the recovery of non-money advances as a just sum. In BP Exploration (Libya) Ltd v Hunt [1983], which involved BP investing lots of non-money resources into a site which was then requisitioned by the Libyan Government, BP were entitled to a fair compensatory award.
  • s 2(3) – Parties may contract out of s 1(2) and s 1(3).
  • s 2(5) – Act does not apply to charterparties, contracts which provide for carriage by sea, insurance or perishable goods contracts. The common law will have to be relied on here.

Discharge by breach

The final way to discharge a contract is by breach. Any breach of contract allows an innocent party to claim damages. Future obligations of both parties may be discharged if the breach is serious enough. A ‘serious’ breach is known as a repudiatory breach. The case of Photo Productions v Securicor [1980] concerned the effectiveness of an exclusion clause when an employee of Securicor set fire to premises which is was under contract to protect, however, the effect of a breach was explained. It was said that when a contract is agreed, each party is required to perform obligations. These are known as ‘primary’ obligations. When these primary are breached, they are automatically substituted for monetary, or ‘secondary’ obligations, which the courts may need to quantify. According to Heyman v Darwins [1942], the contract is not extinguished entirely as some clauses, such as exclusion clauses, will remain effective. In SCI v Titus Sarl [2001], there was no need to refund licence instalments at the contract had been breached by the licensee and provision in place of refund conditions had been substituted.

How is a breach classed as repudiatory?

Contractual terms could initially be categorised into two types of terms, conditions and warranties. Conditions can also be subdivided into promissory and continent (conditional) conditions. If a warranty was broken, there would be an entitlement for damages, but the contract could not be discharged. If a condition was broken, there would be a repudiatory breach, and the contract could be discharged as well as damages being awarded. The difficulty came in distinguishing between warranties and conditions. The HongKong Fir [1962] addressed this difficulty in creating a third type of term: the innominate term, a tool for judicial discretion. Seaworthiness was said to be an innominate term and did not breach the contract on the facts of the charterparty case.

Terms implied by statute, such as those from the Sale of Goods Act 1979, are always to be classed as conditions. In the interest of certainty, in Arcos Ltd v Ronaasen [1933], a buyer was entitled to reject 9/16″ thick wood where 1/2″ was ordered (irrespective of motives). Although, inserted into the Sale of Goods Act 1979 in 1994 was s 15A, which prevents the rejecting of goods unreasonably for slight breaches. This does undermine certainty though. The Hansa Nord [1976] involved a shipment where 1/3 of the contents were damaged. The implied statutory terms from the Sale of Goods Act had been replaced by contractual terms. The court deemed the breach to be non-repudiatory.

One way to make contractual breaches repudiatory is to say in a contract that time is of the essence, or words to that effect. As illustrated by Lombard North Central v Butterworth [1987], this has the ability to all minor breaches of time agreements to discharge a contract entirely. In this case, what would have been an unfair contractual term caused one party to be liable for a full term of rental of a computer. Another example of time-certainty can be found in The Mihalis Angelos [1970], where termination of a contract was allowed where time was of the essence and a ship was not ready by a particular date.

According to The Antaios [1985], where ‘any breach’ is written into a contract, it is to be construed as meaning ‘any repudiatory breach’. As a final point, according to Total Spares & Supplies v Antares [2004], if one party treats a contract as breached by the other when in fact the contract was not breached, they themselves might be in breach, giving the choice of consequences (below) to the other party.

Consequences of repudiatory breaches

If there is a repudiatory breach, a few different things will happen. Firstly, the innocent will be able to claim damages, but will not be able to sue for further obligations (according to Taylor v Webb [1937]). Secondly, the innocent party will have a right of election. The right of election means that the innocent party may decide to either require further performance (affirmation), or to accept the breach, terminating the contract prospectively.

If a breach is accepted, according to The Mihalis Angelos [1970], the reasons for that choice are irrelevant, although if the innocent party was already in breach, but that breach was not accepted, damages may account for the ‘innocent’ party’s breach. Vitol SA v Norelf [1996] said that an election choice must be communicated, though need not take a particular form.

If a breach is affirmed, the innocent party chooses to consider a contract not discharged, and hopes that the party in breach may change their mind. The Kanchenjunga [1990] requires that the facts of a breach are known to the innocent party before affirmation may occur, while Peyman v Lenjani [1985] requires that the implications of affirmation are also known to the innocent party. Affirmation must be communicated, according to Scarf v Jardine [1882], an the right to elect is not lost if an innocent party attempts to ask the party in breach to reconsider first. Reasons must be given for affirmation. An innocent party can be estopped from accepting a breach after electing to affirm a contract following a breach, according to Ace Insurance SA v Seechurn [2002].

Termination clauses

Termination clauses often allow for certainty. In The Brimnes [1975], a termination clause allowed termination of a contract where a montly instalment was not paid promptly; in The Lacunia [1977], it was ok to terminate a contract for late payments where time was of the essence, and in Bunge v Tradax [1981], it was allowable to repudiate a contract for the delivery of soya beans where at least 15 days’ notice of delivery was not given. Although, according to The Afavos [1983], innocent parties must act in accordance with termination clauses or else they will not be enforceable, as was the case here.

For a termination clause to be effectively utilised, an innocent party must show that it applies; that they have acted strictly in accordance with it and invoked it within a reasonable period of time. United Dominions Trust v Ennis [1968] required that a customer was liable for 2/3 of the purchase price of a car after failing to pay the first 2 instalments. This clause was classed as penal.

Anticipatory breach

If one party notifies the other that they intent to breach a contract before the time of performance is due, the would-be innocent party will be entitled to sue pre-emptively too. The doctrine of anticipatory breach allows innocent parties’ time to mitigate their losses, as was the case in Hochster v De La Tour [1853], where a new courier could be arranged. It is a practical doctrine. Of course any prospective renunciation must be clear and absolute, and damages may be claimed for a breach of commitment.

An innocent party cannot compel the performance of the party in breach. White & Carter v McGregor [1962] involved an anticipatory breach advising of a future non-payment for a marketing campaign. This type of breach did not need to be mitigated as it was for the payment of a debt, however, usually it is required that an innocent party attempts to mitigate their losses. In the Alaskan Trader [1983] a ship was left purposefully idle, so damages for an anticipatory breach could not be claimed as there was no legitimate interest in the contract. Finally, in Attica Sea Carriers v Ferrostaal Poseidon [1976], it was not a condition of a contract for a ship to be returned in good repair, damages were sufficient where the cost of repairs would have been greater than the value of the ship.

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