Discharge of contracts

1. Discharge of contracts Law of Contract LW1154 BCL 2005-2006

2. Books • Clarkchapter 18 • McDermott chapters 19-21

3. Introduction:When is performance due?

4. The problem • Suppose a contract has been made … … and one party is concerned that the other might not perform • What is the earliest point at which legal action lies for non-performance? • The parties can specify exactly when the performance falls due • But what if they do not?

5. Full performance by plaintiff • The plaintiff's position is strongest if s/he has fully performed • If the other party should have paid money, then there is an action for that precise sum • If the other party should have provided property or services, then they can be sued for damages, or perhaps for an order for specific performance

6. But if neither side has performed ... … then we must determine the relationship between the two performances • The two performances may be independent ... • … or dependent on one another … • … or one may be a condition precedent to the other

7. “Independent promises” • Each side must perform regardless of the other • Non-performance by the other is no defence • This may be agreed expressly … • … and is the normal presumption in landlord-and-tenant law

8. “Dependent promises” • Each is bound to perform only if the other does • One side can enforce only if they are themselves ready and willing to perform • This is the normal presumption where simultaneous performance is possible … • … eg sale of goods

9. Sale of Goods Act 1893 s 28 Unless otherwise agreed, delivery of the goods and payment of the price are concurrent conditions, that is to say, the seller must be ready and willing to give possession of the goods to the buyer in exchange for the price, and the buyer must be ready and willing to pay the price in exchange for possession of the goods.

10. “Condition precedent” • One side is bound to perform immediately … • … but the other need not perform until the first does • This is the presumption where simultaneous performance is impossible

11. ExampleTrans Trust v. Danubian Trading [1952] 2 QB 297 • International sale of steel • Seller to perform by supplying appropriate shipping documents to buyer’s bank • Buyer to perform by arranging for the bank to pay against those documents • Obviously seller could not perform until buyer had performed

12. “Condition precedent” • Hence the general notion of the “entire contract” … • … under which one side must perform, but the other need only pay on completion … • Partial performance earns nothing • This the presumption for contracts involving services

13. ExampleCutter v. Powell (1795) 101 ER 573 • Undertaking by a sailor to serve on a voyage from Jamaica to Liverpool • Payment 30 guineas, but only if he completed the voyage • He died in the course of the voyage • His widow could recover nothing

14. ExampleCutter v. Powell (1795) 101 ER 573 However, • It is not clear what the reasoning was • Legislation would now reach a different result on the facts • Yet the general principle is correct … • … particularly if the rate paid under the contract is a high one

15. “Entire contracts” Avoidance of the rule: • The courts sometimes hold that substantial performance is enough to earn payment; or • The court may sever the contract into smaller pieces

16. “Substantial performance” • Payment of the contract price is subject to a condition precedent, that the other side should substantially perform • So nothing is due if the work is not substantially finished • If it is, then the price is due … • … though the other side may sue for any uncompleted aspects

17. Example 1 Hoenig v. Isaacs [1952] 2 All ER 175 • Contract to redecorate a flat for £750 • The work was done, except for minor defects (which would cost £55 to put right) • The decorator could sue for £750 … • … though he was liable to pay back £55 in compensation

18. Example 2Bolton v. Mahadeva [1972] 2 All ER 1332 • Contract to install central heating system for £560 • The system as installed produced a small amount of heat, though also fumes • It would cost £174 to correct • The work was held not to have been substantially completed

19. “Severance” • The contract is divided into several distinct parts … • … each of which is an entire contract • So each substantially completed part earns the price for that part • Contracts will be severable if the parties so intend … • … or if statute says so

20. “Severance” – party intention • An intention to sever can be stated expressly in the contract • It can also be inferred from other provisions • eg Payment at piece rates (Brown v. Wood (1854) 6 Ir Jur 221)

21. “Severance” – statute • eg Sale of Goods Act 1893 s 30 (delivery of wrong quantity of goods) • eg Apportionment Act 1870 s 2 (“rents, annuities, dividends, and other periodical payments”)

22. Discharge of contracts

23. Meaning of “discharge” • Some events effectively terminate or “discharge” the contract • The contract is effective up to the point of discharge, and rights created before discharge remain in force • Discharge may itself create rights • But once discharged, the contract can create no more rights

24. What sort of events discharge a contract ? • Agreement • Breach of contract • Refusal to perform (“anticipatory breach”) • Failure of contingent condition • Frustration of contract

25. 1. Discharge by Agreement

26. Discharge by agreement • An agreement to terminate a contract is usually effective • An agreement to vary the terms may also be effective • Doubts as to which of the two the parties have agreed on are a matter for construction of the agreement

27. Validity of the agreement to discharge • Statute may require writing eg Statute of Frauds (Ireland) Act 1695 • There must be an intention to affect legal relations • Consideration is required eg Williams v. Roffey [1991] QB 1

28. Waiver • But even without consideration, one party may waive their rights • So if one party abandons his or her rights … • … s/he can only assert them at a later stage on giving reasonable notice • egCharles Rickards v. Oppenheim [1950] 1 KB 616

29. 2. Discharge by breach

30. One party commits a serious breach of contract The other party (“the innocent party”) may then escape the contract This remedy for breach has great practical importance … … as it can be exercised without going to court Discharge by breach

31. Rights created before the time of discharge remain valid Rights which were to arise after the time of discharge never arise at all Effect of discharge for breach? The contract is valid up to the point of discharge, but no further

32. Effect of discharge • At the instant of discharge ... • … the duty to perform the contract (“the primary duty”) … • … is replaced by a duty to compensate for the lost performance (a “secondary duty”)

33. ExampleHyundai v. Papadopoulos [1980] 1 WLR 1129 • Ship-builders must complete the vessel according to a timetable • Buyers must pay as each stage in the timetable is reached • Suppose buyers fail to make one payment when due … • … whereupon ship-builders discharge the contract

34. ExampleHyundai v. Papadopoulos [1980] 1 WLR 1129 • The contract is valid before discharge • So money payable before discharge remains payable, including the missed installment • The contract is gone for the future • Neither side need perform further, but the ship-builders may sue for their loss of profit

35. ExampleHyundai v. Papadopoulos [1980] 1 WLR 1129 • So the contract creates rights up to the point of discharge, but not after it • The innocent party also gets a right to sue for loss of profit … • … which they may or may not exercise, as they wish

36. But how serious must a breach be to justify discharge by the innocent party ?

37. Which breaches justify discharge? • The parties will sometimes settle this question in advance … • … by agreeing that certain breaches merit cancellation • The courts will usually respect such an agreement

38. Intention unclear? • Where it is not absolutely clear what the parties meant … • … then the court will go for the reasonable solution • But in principle the question is one of construction (=interpretation of the contract) • … not reasonableness

39. ExampleWickman v. Schuler [1974] AC 235 • English firm agrees to act as distributor of a German firm's products • “It is a condition of this contract” that six particular customers were to be visited every week • A majority held that this did not imply a right to cancel if not all the visits were made

40. No intention? • If the parties have not specified the effect of breach, then perhaps the Oireachtas has done so • Statute therefore says exactly what effect breach has … • … unless the parties override this by their own express provision

41. ExampleSale of Goods Act 1893 ss 11-15 • This classifies sale-of-goods terms as: • “conditions”, breach of which allows the innocent party to discharge the contract; or as • “warranties”, breach of which gives rise to damages only

42. What if neither the contract nor the Oireachtas has said ? • Until relatively recently, the courts followed the classification in the Sale of Goods Act 1893 … • … and held that all terms were either “conditions” or “warranties” • The court would classify the term by looking at its importance in the contract and to the parties

43. But then ... • A re-think occurred in the Hong Kong Fir Shipping case [1962] 2 QB 26,involving the owners’ duty to provide a seaworthy ship to a charterer • This duty is in some ways important (eg there should be no holes in the hull) • But in some ways it is trivial (eg there should be sticking plaster in the medicine chest)

44. So as well as “conditions” and “warranties” ... • … there is a third class of term • (“intermediate terms” or “innominate terms” or even “Hong Kong Fir terms”) • Breach gives rise to a right of discharge only if the breach deprives the innocent party of the benefit they entered the contract to obtain

45. The test • So if a contract term is of this third kind … • … then some breaches of it will give rise to a right to terminate, others will not • The magnitude of the breach is the main factor in determining its effect

46. Example 1The Hong Kong Fir case itself • Two-year charter of an ocean-going vessel • The lack of seaworthiness led to delays of 20 weeks • The vessel was still clearly useable outside that period • The charterers were held unable to cancel

47. Sale of citrus pulp, “good condition on shipment” Breach: goods were overheated at the time of shipment But buyers still used the pulp for the intended purpose Again, no sufficiently serious breach Example 2The Hansa Nord[1976] QB 44

48. Batchelor’s paid their goods to be advertised by aerial banner But the pilot mis-timed his flight, and advertised during a Remembrance day 2-minute silence Example 3Aerial Advertising v. Batchelor’s Peas[1938] 2 All ER 788

49. Batchelor’s paid for good publicity … … but got very bad publicity instead Therefore they were entitled to treat the contract as discharged Example 3Aerial Advertising v. Batchelor’s Peas[1938] 2 All ER 788

50. Summary • If neither the parties nor the Oireachtas have said what the effect of breach is … • … then the court must classify the term as a condition, a warranty or a Hong Kong Fir term • If it is the last, then the court must also ask whether the effect of the breach justifies termination