Transcript Discharge of contracts

Discharge of contracts
Law of Contract
LW1154
BCL 2005-2006
1
Books
Clark
chapter 18
McDermott
chapters 19-21
2
Introduction:
When is
performance due?
3
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?
4
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
5
But if neither side has performed ...
… then we must determine the relationship
between the two performances
1.
The two performances may be
independent ...
2.
… or dependent on one another …
3.
… or one may be a condition
precedent to the other
6
“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
7
“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
8
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.
9
“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
10
Example
Trans 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
11
“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
12
Example
Cutter 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
13
Example
Cutter 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
14
“Entire contracts”
Avoidance of the rule:
1.
The courts sometimes hold that
substantial performance is
enough to earn payment; or
2.
The court may sever the contract
into smaller pieces
15
“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
16
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
17
Example 2
Bolton 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
18
“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
19
“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)
20
“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”)
21
Discharge of
contracts
22
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
23
What sort of events
discharge a contract ?
1.
Agreement
2.
Breach of contract
3.
Refusal to perform
(“anticipatory breach”)
4.
Failure of contingent condition
5.
Frustration of contract
24
1. Discharge by Agreement
25
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
26
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
27
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
eg Charles Rickards v. Oppenheim
[1950] 1 KB 616
28
2. Discharge by breach
29
Discharge by breach
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
30
Effect of discharge for breach?
The contract is valid up to the point
of discharge, but no further
Rights created
before the time
of discharge
remain valid
Rights which
were to arise
after the time of
discharge never
arise at all
31
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”)
32
Example
Hyundai 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
33
Example
Hyundai 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
34
Example
Hyundai 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
35
But how serious must a
breach be to justify
discharge by the
innocent party ?
36
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
37
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
38
Example
Wickman 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
39
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
40
Example
Sale 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
41
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
42
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)
43
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
44
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
45
Example 1
The 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
46
Example 2
The Hansa Nord [1976] QB 44
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
47
Example 3
Aerial Advertising v. Batchelor’s
Peas [1938] 2 All ER 788
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
48
Example 3
Aerial Advertising v. Batchelor’s
Peas [1938] 2 All ER 788
Batchelor’s
paid for good publicity …
… but got very bad publicity instead
Therefore they were entitled to treat
the contract as discharged
49
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
50
Classification of terms
What factors are relevant in
classifying the term?
Precedent
How
important did the parties think the
term was ?
What are the likely effects of breach ?
51
Terms as to time
In
commercial cases, the presumption
is that the term is a condition ...
...
that “time is of the essence”
eg Bunge v. Tradax [1981] 1 WLR 711
But
any evidence of party intent is
relevant
52
Terms as to time
But
a different attitude is taken in land
transactions - the presumption is that
time is not of the essence
This
presumption can be rebutted by
evidence of what the parties intended
eg Union Eagle v. Golden Achievement
[1997] 2 All ER 215
53
Terms as to time
Where
time is not of the essence but
there is a substantial delay …
… then either party can make time of the
essence by setting the other a
reasonable deadline
If the deadline is not met, then the
contract may be terminated
eg Nolan v. Driscoll HC 25/4/78
54
Exercising the right to terminate
If
a sufficiently serious breach has
been committed …
… the innocent party has the right to
discharge …
... but the contract remains in force
unless the right is exercised
It may be in the innocent party’s
interests to keep the contract alive
55
The right arises only once
The Kanchenjunga [1990] 1 Ll 391
A charterer
ordered a tanker to an oil
terminal (Kharg Island) in a war zone
The
ship-owner could have discharged
the contract
But
the ship-owner went along with this
So
the right to discharge the contract
was lost
56
Exercising the right to terminate
An
unequivocal declaration, that the
contract is cancelled, is needed
It
is not enough for the innocent party
simply to protest at the breach …
…
or to say that they are “really upset
to receive notice of non-performance”
Yukong Line v. Rendsburg Investments
[1996] 2 Ll 604
57
Can the right be exercised by
silence ?
The
right must be exercised
unequivocally, and silence is rarely
unequivocal
But sometimes silence can only mean
one thing …
… and so silence can sometimes
amount to an exercise of the right
eg The Santa Clara [1996] AC 800
58
The reason given for discharge
Does
it matter why the innocent party
decides to terminate the contract?
Most common law jurisdictions say that
it does not matter at all …
… as the question is whether they had
the right to terminate, not whether they
were behaving reasonably
But Irish law takes a different line
59
The reason given for discharge
The
Irish rule is that termination of the
contract must be justified on the
grounds given at the time, if at all …
… but if a “fundamental breach” is later
discovered, termination can be based
on that
eg Hearn v. Collins HC 3 /2/98
For criticism see O’Dell [1998] Annual
Review of Irish Law 146
60
Does the innocent party
have to terminate?
The basic rule is that
the innocent party has a free
choice whether or not to
discharge the contract
61
Example
White & Carter v. McGregor [1962]
AC 413
A company ordered two years’ worth
of advertising from an agency
Very soon afterwards, they purported
to cancel, and never paid a penny
But the agency insisted on providing
the advertising anyway
It was held that the agency were
entitled to keep the contract in being,
and claim the price
62
Basic rule + exceptions
So the basic rule is that the
innocent party does not have to
terminate
 But two exceptions are recognised:
1. Where the co-operation of both
parties is needed
2. Where the innocent party has no
legitimate interest in continuing

63
Exception: Co-operation needed
If
a contract needs the co-operation of
both parties …
… then the innocent party cannot
proceed if the other party will not
eg contract of employment ...
… though perhaps in theory the
contract can still be kept alive
(Gunton v. Richmond LBC [1981] Ch
448)
64
Exception: No legitimate interest
Suppose
the innocent party insists on
performing, but this would force goods
or services onto a party who has no
use for them
The court may rule that there is no
legitimate interest in so doing …
… and so the innocent party must
terminate
65
Exception: No legitimate interest
This
doctrine is well established ...
…
but it is not clear how the
“legitimate interest” is defined …
…
or whether there was such an
interest in White & Carter v.
McGregor itself
66
Example
The Alaskan Trader
[1984] 1 All ER 129
Charterers
of a cargo vessel refused to
take command of it according to the
contract
The owners kept it crewed and
available for the whole charter period
The Commercial Court said that there
was no legitimate commercial interest
in doing so
67
3. Discharge by refusal
to perform
68
“Anticipatory breach”
performance is due on 1st
September …
… then on 1st April, one side refuses to
perform
There is not yet a breach of contract
But under the doctrine of anticipatory
breach the refusal gives a right to
terminate
Suppose
69
The position is the same as
on actual breach
The
innocent party may either affirm the
contract or discharge it
Discharge
must be unequivocal;
otherwise, the contract remains in force
The
innocent party’s choice may be
limited where there is no legitimate
interest in keeping the contract in being
70
So the innocent party has a choice
They
can
ignore the
refusal …
… so that the
contract
continues as if
nothing has
happened
Or
they can accept
the refusal ...
... so that the
contract is
discharged ...
... and the innocent
party can sue for
damages
71
How serious a refusal to perform
is needed?
Case
1: Refusal to perform any part
of the contract
Case 2: Deliberately disabling
oneself from performing
any part of the contract
In both these cases, the innocent
party may escape the contract
72
Case 3: Partial refusal to perform
Where
one side refuses to perform
some part or aspect of the contract …
…
the court will have to decide
whether this can fairly be treated as a
repudiation of the contract …
…
or only as a minor breach
Various
factors are relevant
73
Case 3: Partial refusal to perform
Relevant factors:Importance of the unperformed part
Whether the refusal to perform was
in good faith
Whether the refusal was an isolated
incident
The reasonableness of behaviour
on both sides
74
Example 1
Carr v. Limerick VEC [2000] ELR 57
P
was employed by D as principal of
a school, on a permanent basis
The
school was then to be merged
with another
P
was ordered to report to the
merged school for work
She
refused
75
Example 1
Carr v. Limerick VEC [2000] ELR 57
The Supreme Court held that she was not
in anticipatory breach:
She
had not been told what her new
duties were
No
attempt had been made to offer her
a new principalship, or to negotiate a
new job for her
76
Example 2
House of Spring Gardens v. Point
Blank [1985] FSR 327
P
licensed D to manufacture bullet-proof
vests to P’s design
D stole P’s design, modified it slightly
and manufactured their own vests
This was held to be an anticipatory
breach of the licence contract
It was emphasised that D had used
fraud
77
4. Discharge by failure of
contingent condition
78
Definition
Where
the contract states that it is
conditional on the happening of a
certain event …
… then it is discharged as soon as
it becomes clear that the event
cannot occur
The precise effect of a condition is
entirely a matter for the contract
79
Different types of conditions
A condition
may be a “condition
precedent” (=the contract does not
come into existence until the
condition is satisfied) …
…
or a “condition subsequent”
(=the contract exists but is
discharged if the condition cannot
be satisfied)
80
Different types of conditions
A condition
precedent may prevent
a contract coming into existence at
all …
… or it may be merely suspensory
(=the contract exists, but neither
side can sue until the condition is
satisfied)
81
Different types of conditions
A condition
may be for the benefit
of both parties (in which case it
operates automatically) …
…
or for the benefit of one party
only (in which case that party can
dispense with compliance if they
wish)
82
Example
O'Connor v. Coady [2003] IEHC 77
Agreement
for the sale of land
Contract was subject to the
purchaser’s obtaining planning
permission for the land within 4 months
At the end of the 4 months, permission
had not been obtained
But the condition was obviously for the
purchaser's benefit, and so he could
waive it
83
5. Discharge by
frustration of contract
84
The absoluteness of
contractual obligations
Contracting
parties are expected to do
exactly what they said they would
Contractual
duties are not simply
duties of “best efforts” (unless they are
agreed as such)
There
is no general defence of
unfairness or change-of-circumstance
85
When is a defence available?
Where
the parties have based their
agreement on the existence of a certain
state of affairs …
… but that state of affairs then
disappears …
… then the contract has no application to
the facts as they are …
… and is said to have been “frustrated”
86
Example
Taylor v. Caldwell
(1863) 122 ER 309
Owners
of a music hall agree to hire it
Before
the start of the letting, the hall
burns down
The
contract assumed the existence of
the hall …
…
and so was discharged by the fire
87
When is a defence available?
So
we look at the sort of facts the
contract presupposes …
… and if those facts vanish, then the
contract vanishes with them
There is no concern with fairness as
such
Rather, the test is whether the facts
have fallen outside those envisaged
when the contract was made
88
“If ... a consideration of the terms of the
contract, in the light of the circumstances
existing when it was made, shows that they
never agreed to be bound in a fundamentally
different situation which has now
unexpectedly emerged, the contract ceases
to bind at that point — not because the court
in its discretion thinks it just and reasonable
to qualify the terms of the contract, but
because on its true construction it does not
apply in that situation”
(British Movietonenews v. London Cinemas
[1952] AC 166)
89
Relevance of the parties’
intention
So
we refer closely to the parties’
intentions …
…
to determine what assumptions the
parties were making …
…
so that we can refuse to apply the
contract where those assumptions no
longer hold
90
Need the frustrating event
be unforeseen?
The
question is, what sort of
circumstances the contract provides for
A failure to provide for certain events
may (or may not) be because they were
unforeseen
Frustration can certainly cover foreseen
events, if the contract makes no
provision for them
91
Example 1
Bank Line v. Capel
[1919] AC 435
Charter
of a vessel from April to April
The vessel was requisitioned, and not
released until September
This was considered to make the
charter an entirely different type of
transaction
Therefore the contract was frustrated
92
Example 2
Neville v. Guardian [1995] 1 IRLM 1
D
owned a plot of land, and contracted
with P for P to build on it
D undertook to secure access rights
for a road to the land
However D failed to secure
satisfactory terms for access, and
cancelled the project
No frustration found
93
Example 3
Davis v. Fareham UDC [1956] AC 696
Contract
to build an estate in 8 months
Due to labour shortages, it took 22
months …
… and involved much more expense
than was originally estimated
Nonetheless, no frustration was found
Labour shortages were within the
range of the parties’ contemplation
94
The doctrine is very hard to
invoke
Most
successful pleas of frustration
are wartime cases …
… and most of those are about
disruption to shipping
It is very hard to base frustration
merely on changed economic
conditions, however severe
95
Example 4
The coronation cases
These
involve entertainments planned
for the coronation of Edward VII …
… which were cancelled on his illness
Some are technically cases of Mistake
Some involve contract interpretation
A few involve (what we would now call)
frustration
96
Krell v. Henry
[1903] 2 KB 740
A flat
was hired for a few days at a high
rent
No motive was stated in the contract …
… but it was in fact to watch the
coronation processions
Cancellation of the coronation was held
to falsify an assumption underlying the
contract, and hence to terminate it
97
Herne Bay Steamboat v.
Hutton [1903] 2 KB 683
A boat
was hired to tour the fleet at
anchor …
… at the time set for ceremonies to
celebrate the coronation
But the contract was not held frustrated
on cancellation of the coronation
Unlike Krell v. Henry, the arrangement
was still a workable one
98
Is Krell v. Henry right?
The
case has never been directly
followed, and it has been criticised as
often as it has been approved
It is not a case of impossibility
Nonetheless it seems defensible …
… as the holding of the coronation on
the contract date was plainly a
common contractual assumption
99
Can all contracts be frustrated?
At
common law, it was considered that
leases could not be frustrated
But the English courts have departed
from this (National Carriers v.
Panalpina [1981] 1 All ER 161)
In any event, most Irish cases are
covered by Deasy’s Act
(Landlord and Tenant Law (Amendment)
Act (Ireland) 1860 s 40)
100
Self-induced frustration
Frustration
cannot be pleaded by
someone who is responsible for the
frustrating event …
…
whether deliberately or negligently
eg Byrne v. Limerick SS [1946] IR
138
101
Self-induced frustration
The
rule is applied strictly
No-one who could have performed a
contract can say that it is frustrated
The reasonableness of carrying out
the contract is irrelevant …
… nor is it a defence that the
defendants cannot perform all of their
contracts
102
Example
The Super Servant II [1990] 1 Ll 1
D
hired out two specialised vessels,
SS I and SS 2
The SS I sank, a potentially frustrating
circumstance
However, no contract which could be
carried out by SS2 was frustrated …
… even though D could not satisfy all
of those contracts
103
Frustration by subsequent
illegality
If
the law changes, so that the
contractual performance is now illegal,
then the contract is frustrated
But this is conceptually distinct from
other forms of frustration
The point is not that the contract is
hard to perform …
… but that it is illegal to perform
104
Effect of frustration
Rights
which accrued before the
frustrating event remain valid
After frustration, the contract cannot
create any new rights
Money paid before frustration is
recoverable if it was paid on a total
failure of consideration
(Fibrosa v. Fairbairn [1943] AC 32)
105
106