businesslaw- discharge of contract

Discharge of Contract

Sangay Paldon

Principles of Business Law (BLW203)

Table of Contents1. Introduction:........................................................................................................2

2. Performance:.......................................................................................................3

2.1. Substantial performance...............................................................................4

2.2. Partial performance......................................................................................4

2.3. Quantum Meruit:..........................................................................................5

2.4. Severable Contracts.....................................................................................5

3. Agreement:..........................................................................................................5

3.1. Novation:.....................................................................................................6

3.2. Rescission:...................................................................................................6

3.3. Alteration:....................................................................................................7

3.4. Remission:...................................................................................................7

4. Breach:................................................................................................................8

4.1. Anticipatory breach of contract...................................................................8

4.2. Actual breach of contract:...........................................................................8

5. Frustration:..........................................................................................................9

6. Conclusion:.......................................................................................................12

7. References:....................................................................................................13

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1. Introduction:

Men are social animals who live in the so called societies. It is a predictable course of nature that every animal such as us who live in clusters are bound to have misunderstandings. But unlike other beings, we humans solve them more morally and ethically. Law and order created by we men have tamed us and bound us within the walls. Any actions against law are punished accordingly. Hence, social order and predictability are the gifts of law.

Contract:

If a person promised to pay you for the work done, or someone promised to deliver goods for you to another state: how are you to know if those works will be done as promised, uncertainty arises in every phase of our life. Hence, to deal with such uncertainties, concepts of contracts have been developed. (The terms of contract are enforceable just within the boundary it was created in.)

So, what is contract? “An agreement between two or more competent parties in which an offer is made and accepted, and each party benefits. The agreement can be formal, informal, written, oral or just plain understood.”

Discharge of contract:

When two parties are relieved from their contractual obligations and they are no longer bound by contractual relations, it is termed as discharge of contract. The elements of discharge of contract are mentioned below which will be dealt in detail later.

discharge by performance- both the parties fulfill the terms of contract and do

what they have agreed to do

discharge by agreement-Both the parties jointly put an end to contract

Anticipatory breach- one party refuses to do his part of contract

Frustration- without the fault of any party the contract is impossible to be carried out

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Figure: Modes of discharge of contract

2. Performance:

When parties fulfill what they promised to do, contracts get discharged.

Tender of performance:

When a party has unconditionally offered to perform a contract and such tender is accomplished, the contract gets discharged. If the party refuses to perform the task, the party making the tender has the right to sue.

Types of performance:

Complete Performance

When the contractual obligations are fulfilled exactly, the performance is complete.

Cutter v Powell (1795)

Fact

Contract note: “Ten days after the ship Governor Parry, myself master, arrives at liverpool, I promise to pay to Mr. T. Cutter the sum of thirty guineas, provided he proceeds, continues and does his duty as second mate in the said ship from hence to the port of Liverpool. Kingston, July 31st, 1793.”

Mr. T. Cutter died when three- quarter journey completed.

Held Cutter’s widow could claim nothing because of incomplete performance.

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Modes of Discharge of contract

By performance

Actual performance

Tender

By agreement

Novation

Rescission

Alteration

remission

Waiver

By breach

Actual

Anticipatory

By frustration

Change of law

Illegality

Death

Destruction of subject matter

Ceasation of stat of things


However, there are some exceptions to this law. They are mentioned below:

2.1. Substantial performanceInsignificant defects can be ignored being `de minimis’.

When there is only slight difference for what is done and what is agreed to,

the contract cannot be considered breached. However, compensations can be

claimed accordingly.

Hoenig v Isaacs (1952).

Fact

Mr. Isaacs had to decorate and furnish Mr.

Hoenig’s flat for £750. When the work

completed, problem arose with a wardrobe and

bookcase which would cost £55 to fix.

£350 was outstanding which Mr. Hoenig

refused to pay.

Hel

d

The work was done with merely bits of

damages. Therefore compensation for damage

could be claimed.

2.2. Partial performanceIf the contractual terms have been partially fulfilled and the other party agrees

upon it then, the defaulting party will be entitled to claim his share for the work

accomplished.

Christy v Row (1808)

Fact Christy had earlier promised that he would carry Row’s coal from Shields to Hamburg. Due to war, Christy could not. Row asked Christy to send it to another destination.

Held Christy was able to claim for partial performance

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2.3. Quantum Meruit:If a party creates hindrance and stops the other party from fulfilling the

contractual liabilities, other party is entitled to claim for compensation.

Planche v Colburn (1831)

Fact Planche was to write a book 'Costume and Ancient Armour' for a series and he was to receive £100 on completion. He had completed the necessary research but the book was yet to be written. The publisher decided to abandon the series. Planche sued the publisher for breach of original contract.

Held Original contract was discharged by the defendant and no other contract was there to substitute it. Plaintiff obtained 50 guineas for reasonable remuneration on a quantum meruit.

2.4. Severable ContractsIf a contract requires specific payments different stages of performance, the

party can acquire payments due when each stages of job is accomplished

else the party can sue the other.

Roberts v Havelock (1832)

Fact The contract between the two parties did not expressly state when the payment was to be made. The shipwright who agreed to repair the ship chose not to work later.

Held The shipwright was not legally bound to perform his job until he claims some payment.

3. Agreement:Parties are free to enter into a contract. Similarly, they are free to negotiate their way out by releasing themselves from contractual obligations. In such cases they form a new contract of mutual release which in turn terminates the old contract. However, parties should not have any outstanding obligations that must be fulfilled from the old contract else valuable considerations are required to be made. Alternatively, release can be executed under seal.

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Edgar v Lawler BrosFact Employment contract “Sack me!”

Held contract terminated by mutual agreement

Discharge by Mutual Agreement

3.1. Novation:

When a new contract substitutes the old contract, the consideration for new

contract automatically discharges the original one. It can even involve the

substitution of new party who was not involved in contractual obligation.

However, Novation cannot be compulsory. It should be done by mutual

consent. The new contract must be a valid one else the old contract revives.

For example:

A owes money to B under a contract. A, B and C form another contract

which makes C the debtor. Thus the old contract between A and B gets

cancelled and a new contract is formed between B and C.

3.2. Rescission:

Rescission means cancellation. When any party or all the parties cancel the

contract, it gets discharged.

Contract may be cancelled before the date of performance by mutual

agreement. Thus the two parties will no longer be bound by contractual

obligations.

For example:

X promises to sell and deliver goods on 7th September to Y. Y promises to

pay the money on 30th September. X does not deliver the goods. Y may

rescind the contract.

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3.3. Alteration:

The term itself suggests that there occurs change in the terms of the contract

with mutual agreement. Alteration of contract discharges the original contract

but the parties performing the contract remain unaltered.

For example:

X promises Y to sell and deliver goods to in his warehouse. Later X and Y

mutually come to an agreement that the goods should be delivered to Z’s

warehouse. This terminates the old contract and the new contract comes into

effect.

3.4. Remission:

Remission means acceptance of lesser amount of money than that was first

decided for lesser fulfillment of contractual obligations.

For example:

Y promises to paint Z’s house. Z promises to give him $100. Later when the

work was completed, they reached to an agreement for $75. This payment is

the discharge of the contract.

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4. Breach:Any Failure to fulfill the terms in a contract can be termed as breach of

contract. A contract can be breached if:

A party does not fulfill terms he agreed to fulfill

A party does only a part of what he agreed to

The task is badly done.

A breach of contract may occur in two ways.

4.1. Anticipatory breach of contract:Either party may by words or action before the performance is due may show no intention to perform his part of the legal obligation. Party may declare his intention of not performing in the following ways:

When a party bound by contract refuses to perform his duty. When a party disables himself from performing his promise.

However, only breach of condition will discharge the innocent party.

Hochster v De La Tour (1853)

Fact Before the time of performance, the employer told the employee that he would not require performing any service. The courier sued for damage immediately.

Held The court held that he was entitled to do so

Avery v Bowden (1855)

A charter party provided that ship be sent to Odessa and then take a cargo from charter agent. When the ship arrived, the charter’s agent could not provide. The ship master demanded but then war broke out. The charter sued the ship.

The agent’s action amounted to anticipatory repudiation, but the ship master kept the contract alive until

4.2. Actual breach of contract:A party may break a condition or in fact break every terms of the contract resulting in subsequent failure of continuation of the contract. Actual breach may occur in following circumstances.

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On Due date of performanceif party fails or refuses to perform at given time for performance

During the course of performance- If half of the work is done while the party fails to complete the rest.

White & Carter v McGregor [1961]

Advertising contractor had a contract with the garage proprietor to display advertisements for his garage for three years. The proprietor repudiated the agreement and cancelled on the dame day. The advertising contractor refused and performed their obligation. They sued for contract price.

The House of Lords held, by a majority of 3:2 that advertising contractor was entitled to the full contract price.

Panchaud Freres SA v Establissments General Grain Co [1970]

Maize buyers rejected maize on a ground that was considered insufficient.Three years later, they found out that the maize was not shipped in the given time. They therefore sought rejection in this ground. It was stated that the buyers sought late delivery as a reason for rejection of contract though they did not lead the sellers to believe so.

The court of Appeal held that they were not entitled to do so.

5. Frustration:When the failure to perform the contractual obligation is the result of events beyond one’s control, the contract is frustrated. In such a case, even advance payments made are easily refundable and the advance work done in preparation for performance of contract can be reimbursed.

For frustration of contract to occur, frustration events must satisfy some conditions.

a) The terms of contract cannot be carried out because it has become

illegal due to changes in the law.

Re Shipton, Anderson and Harrison Brothers [1915]

Fact

The two parties had signed a contract for sales of wheat. Due to wartime emergency, government requisitioned the wheat for control of food supplies. The goods was yet to be delivered and ownership had yet to be passed on to the buyer under the terms of contract

held

Seller was excused from further performance of contract. It was impossible to deal with goods that are now owned by the government.

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b) Essential elements to perform the contract has been destroyed

Taylor v.

Caldwell

(1863)

Fact The concert hall that was booked for performance got burned

down by the fire. The claimant sued for the expenses

incurred in advertising the concert

Hel

d

The court held that the contract was frustrated by the incident.

c) The person performing the contract is unavailable due to illness or any

other reasons

Condor v. The Barron Knights (1966)

Fact The doctor certified that the drummer (claimant) could no longer play for seven nights a week instead he should opt for four nights a week.

Held The contract was frustrated due to his illness, therefore it properly terminated.

d) Certain circumstances have now changed. Therefore, it is impossible for

the contract to be carried out.

Tsakiroglou & Co. Ltd v. Noblee Thorl (1962)

Fact

Tsakiroglou & Co. Ltd. Was supposed to ship groundnuts from Sudan to Hamburg, Germany via Suez Canal. But, the defendant did not ship the groundnuts making an excuse that the canal was closed because the canal was closed.

Held The contract is not frustrated because it is not the only route used for transport of goods. The ship could go via Cape of Good hope, though this may increase the expenses. But, the contract cannot be termed frustrated just because the task got harder.

e) Commercial frustration

Jackson v Union Marine Insurance 1874

Fact Jackson (charterer) hired a ship for immediate load of cargo as he had to set off to san Francisco. The ship was damaged so it had to send for repair. Jackson cancelled to contract due to delay in work. Hirer took actions claiming breach of contract

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Held There was commercial frustration therefore Jackson was relieved.

The contract will not be held to be frustrated if:

a) There is a possibility to perform the contract but the circumstances

become more difficult and expensive.

b) Due to individuals action, the contract has become impossible to be

carried out i.e. self-induced frustration;

c) If a clause has been included in the contract to cover any frustration

that may occur; Wong Lai Ying v Chinachem Investment Co (1979)

d) The parties have foreseen that the contract may become impossible

to be carried out.

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6. Conclusion:

A contract has always been considered a compact between two or more parties. Till date many contracts have been made and many have been broken. Law has always stood to help the innocent. But the law too had problems, pragmatic and theoretical. Many complications have aroused through these years and exceptional cases have puzzled judges. And we see some landmark cases to justify that solutions have been discovered and will continue.

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7. References:

P C Tulsian,(2007). Business Law. Tata McGraw-Hill Publishing Company Limited: New Delhi

Website: “Cutter v Powell. Available at:http://en.wikipedia.org/wiki/Cutter_v_Powell [modified on 24 July 2010 at 08:12] [Accessed on 15 October]

Website: “Discharge of contract. Available at: http://legal-dictionary.thefreedictionary.com/Discharge+of+a+contract [Accessed on 20 October]

Website: “Lectlaw.com. Contract. Available at: http://lectlaw2.securesites.net/def/c123.htm [Accessed on: 19 October 2010]

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http://lectlaw2.securesites.net/def/c123.htm

http://legal-dictionary.thefreedictionary.com/Discharge+of+a+contract

http://legal-dictionary.thefreedictionary.com/Discharge+of+a+contract

http://en.wikipedia.org/wiki/Cutter_v_Powell

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