General Principles of English Law

(GPEL)

Contract Lecture 3:

Discharge and Remedies

Theresa Lynch (Law School: Room 118)

T.Lynch@bham.ac.uk

Contract Law: GPEL

Contract Law Elements GPEL module:

The essential features in the formation of a contract (offer,

acceptance, consideration, intention to create legal relations and

privity). Dr. Sanders has covered these elements of contract law

with you in Lectures 1 and 2 on Contract Law).

Over the next three weeks the remaining contract lectures will

focus on:

The different types of contractual terms and their

significance;

Defects and vitiating factors

Discharging a contract (through performance, agreement

and frustration.

The available remedies following breach of contract.

Change to Lecture Schedule

You will attend a Seminar 3 in either week

9/10 on discharging contracts and remedies

for breach of contract.

NB. The supervision sheet for Seminar 3 is now on

WebCT.

Therefore today‟s lecture (so as to ensure

that you have been lectured on the seminar

topic before you have the seminar), will be on

discharge and remedies.

New Lecture Schedule

So your new lecture schedule is:

Contract Lecture (3): Week 8 (wk/b 15th

November 2011) Discharge and Remedies

Contract Lecture (4): Week 9 (wk/b 21st

November 2011) Terms/Content of a

Contract

Contract Lecture (5): Week 10 (wk/b 15th

November 2011) Defects and vitiating

factors.

NB. TIMES AND VENUES OF LECTURES DO

NOT CHANGE

Lecture Overview

A contract establishes the rights and duties of

the parties and where successfully completed

the parties will be considered to have

discharged their responsibilities.

However, this is not the only way in which the

contract may be discharged and this lecture

will discuss these other ways.

This lecture will also importantly, identify the

remedies available when a party has

breached a contract.

Lecture Overview Contd.

This lecture will be split into two halves:

1. Discharging a Contract

2. Remedies for Breach of Contract

Learning Outcomes

Following this lecture you should be able to:

List and discuss the ways in which a contract

may be discharged;

Identify the remedies available for breach of

contract; and

Have an understanding of the implications of

the equitable remedies available for breach of

contract.

Part 1

Discharging a Contract There are 4 ways in which a contract may be

discharged:

1. Agreement

2. Performance

3. Frustration

4. Breach

1. Agreement

Both parties agree to end the agreement.

The parties may agree between themselves

that they no longer wish to continue with the

contract, and therefore release each other

from their obligations.

As this is in effect a new contract, and varying

a contract requires formalities to make it valid,

the elements of agreement and consideration

are necessary.

2. Performance Normally, for a contract to be discharged by

performance complete performance of all

obligations is required.

The most obvious form of discharge is

through the parties‟ completion of their

obligations (the contract performed).

Where complete performance has not been

achieved, the courts have developed rules on

what implications such a situation will have

for the parties.

Cutter v. Powell [1975] 6 Term Rep 320

Jamaica, Kingston Harbour.

Cutter v. Powell [1975] 6 Term Rep 320

Captain Powell engaged Cutter as part of his crew in a voyage from

Jamaica to Liverpool.

The contract stipulated that the contract was only fulfilled when the

entire contract was performed and payment was only due when the

voyage was completed.

Mr Cutter died 19 days before the vessel arrived in Liverpool and his

widow claimed for his owed wages.

It was held that the claim must be denied as it was a condition of the

contract that payment would be made on completion of the voyage, and

this had not been complied with.

Cutter v Powell established that for a contract to be discharged by

performance – complete performance of all obligations is required.

General Rule on Performance: Exceptions The general rule is that for a contract to be discharged

by performance complete performance of all obligations

is required (Cutter v Powell).

However, there are exceptions to this general rule. These are:

a. where contract is divisible.

b. where “substantial performance” has been carried

out. Hoenig v Isaacs [1952] 2 All ER 176

c. where the performance of the obligation in question

has been prevented by the other party to the

contract. Planché v Colburn [1824-34] All ER 94

d. where the other party has accepted part

performance instead.

a. Where the contract is divisible

This means that the contract is broken into smaller units.

Example

A contract for the shipment of cargo was agreed at a price of £5 per

ton. Not all of the cargo was delivered; therefore the owners

claimed a breach. Further, they asserted that they were not obliged

to pay an amount as the entire contract has not been completed.

It was held in Ritchie v Atkinson [1808] 10 East that there was a

breach, but as this was divisible contract payment was due on the

basis of the number of tons of cargo actually delivered.

b. Substantial Performance

If, on the other hand, a substantial proportion of

the contract has been completed, the innocent

party has an obligation to pay, taking into account

the short comings of the contract.

This was demonstrated in Hoeing v Isaacs [1952]

2 All ER 176.

Hoeing v Isaacs [1952] 2 All ER 176.

Problems with a book shelf/cupboard that

was left unfinished/not in working order.

Hoeing v Isaacs [1952] 2 All ER 176.

In this case a contract was established for the decorating and

furnishing of a flat for a fee of £750.The work was done but it

contained some defects ( book shelf/cupboard was left unfinished/not

in working order).

The cost of putting right the defects was no more than £55. The

defendant claimed that the contract was an entire contract and that

since the plaintiff had not fully completed the work he was not entitled

to any payment.

However, the Court of Appeal held that since the defect was very

minor, there had been substantial performance of the contract. The

defendant was therefore bound to pay the contract price less the cost

of rectifying the defect.

This result in this case is fair because to uphold the defendant‟s

argument would have resulted in the defendant retaining the benefit of

the plaintiff‟s work without paying anything for it.

c. One Party Prevents the Other from

Completing Performance

There is also a claim for partial or substantial performance

of the contract if the full and complete performance of the

contract was prevented through the other party‟s actions.

In Planche v Colburn [1831] 5 C & P 58, a book was

commissioned (for a fee of £100) and the author had

partially completed this when the contract was cancelled. It

was held that £50 was to be paid to the claimant for the

work already completed (known as quantum meruit

assessment).

d. Part Performance

There may exist in situations where a contract is not fully

completed, and the other party voluntarily accepts the

partial performance.

It must be noted at this stage that the acceptance must

undertaken voluntarily for it to be valid.

In the case of Sumpter v Hedges [1898] 1 QB 673, it

was decided that where the innocent party has no choice

but to accept the part performance the party in breach is

not entitled to payment for the work completed on the

contract.

The acceptance of the partial performance discharges

the party from any further obligation under the contract

and the innocent party must pay an appropriate

proportion of the price.

3. Frustration Where subsequent events outside the parties‟ control

render the performance of contract impossible or futile,

the contract is said to have been “frustrated”.

Frustration has been found to discharge a contract on

three main grounds. These are:

a. impossibility of performance (destruction of subject

matter of contract ),

b. supervening Illegality (change in the law) or,

c. Frustration of Purpose (purpose of contract no

longer available).

a. Impossibility In a situation where the subject matter of the contract has ceased to

exist before the contract has been performed, and its neither party‟s

fault that this has occurred, then the courts consider this to be

frustration. For example, in Taylor v Caldwell [1861-73] All ER Rep

24:

T and C had entered into a contract on 27th May 1861 where C had

agreed to let T have the use of the Surrey Gardens and music Hall

at a rate of £100 per day. This hire was to take place for four days

for the purpose of giving a series of grand concerts. The contract

was established, but before the first performance the Music hall was

destroyed by fire and therefore the contracts could not take place.

Taylor claimed damages for the money spent on the advertising and

preparation for the concerts.

The decision of the High Court was „... the Music Hall having ceased

to exist, without fault of either party, both parties are excused, the

plaintiff from taking the gardens and paying the money, the

defendants from performing their promise to give the use of the Hall

and Gardens and other things‟.

b. Supervening Illegality If the parties have agreed a contract, but before the contract is due

to be performed it subsequently becomes illegal, then the contract

is frustrated.

This was the case in Fibrosa Spolka Akcyjna v Fairbairn Lawson

Combe Barbour [1943] involving the outbreak of hostilities between

England and Germany.

Here Fairbairn based in England could not legally supply good to

Fibrosa, based in Poland, as Germany had occupied Poland in

1939 and England had declared war on Germany. There was a

provision preventing British companies from supplying, inter alia,

machinery to an enemy-occupied country, and consequently the

contract was frustrated. Any attempt to deliver the goods under the

contract would result in supervening illegality.

c. Frustration of Purpose If parties contract for a specific event, and for some reason this event does not

take place, the contract will be frustrated. For example In Krell v Henry [1900-

03] All ER Rep 20:

K left instructions with his solicitor to rent out his suite of chambers located

at 56a Pall Mall. On 17 June 1902 H responded to an advertisement for the

hire of the flat) from which it was possible to view the procession of the

King‟s coronation). H agreed to take the suite, and paid a deposit, but the

King became ill before the coronation and hence the procession was

cancelled. Henry refused to pay the balance due and K began an action to

recover the sum. It was argued by K that the contract could still continue as

the flat was still in existence, and H could still have the use of it for the days

for the days identified in the contract.

The Court of Appeal held that the contract was frustrated. It took a broader

view that the entire purpose of hiring the flat was to view the coronation

(evidenced from the price paid to hire the premises). The King‟s illness was

the fault of neither party but its effect was to make the contract radically

different from what was agreed. Hence the contract was frustrated.

When Does the Frustration Rule Not

Apply?

If event should have been foreseeable when

contract made;

If the party causes the frustrating event;

When an alternative method of performance

is still possible;

If the contract is simply „too expensive‟ to

perform.

The Effect of the Frustration Rule The effect of frustration result in the parties

being discharged from any further

performance in the contract and any money

paid is returned (at the discretion of the

court).

It should be noted at the that this known as a

doctrine of last resort and will therefore only

be used where the parties have not made

their own arrangement for a frustrating event.

The courts have encouraged the parties to

make provisions in the contract on the basis

of such eventualities.

The Effect of the Frustration Rule Contd. If no provisions are contained in the contract, assistance has

been provided through the Law Reform (Frustrated

Contracts) Act 1943. This statute provides that:

Any money paid is recoverable;

Any money to be paid in the future ceases to be payable;

A party who received a valuable benefit from other party‟s

performance before the frustrating event may have to pay

for that benefit.

These provisions do not apply if the parties make their own

provisions for the effect of frustration.

4. Breach

Any breach will allow an innocent party to

claim damages; BUT not every breach is

capable of resulting in discharge of contract.

This will depend upon the type of contractual

term that has been breached.

Next weeks lecture is on terms/content of a

contract but it is useful to set out two of the

main terms at this stage also.

Terms of a contract: Conditions and

Warranties

Conditions are important terms of a contract

often described as a term that „goes to the

heart of a contract‟ (ie. that the term could be

said to be what the contract is all about).

Warranties are lesser or subsidiary terms of a

contract distinct from the vital terms which are

the conditions.

Typically breach of a condition will result in

the discharge of a contract, but only if the

injured party wishes to do so.

On the other hand, one cannot discharge a

contract for breach of a warranty.

Anticipatory Breach

An anticipatory breach occurs where one

party indicates before performance is due

that they do not intend to perform their

obligations. In this type of situation the other

party may cancel the contract and sue for

damages at this point or wait until it is time for

performance then cancel and sue.

Overview: Discharging a Contract 1. Agreement

2. Performance

Exceptions

a. where contract is divisible.

b. where substantial performance has been carried out.

c. where the performance of the obligation in question has been prevented by

the other party to the contract.

d. where the other party has accepted part performance instead.

3. Frustration

Types of Frustration

a. impossibility of performance (destruction of subject matter of contract ),

b. supervening Illegality (change in the law) or,

c. Frustration of Purpose (purpose of contract no longer available).

When does the Frustration Rule not apply?

The Effects of Frustration

4. Breach

Terms of a Contract

Anticipatory Breach

Part 2

Remedies for Breach of Contract

In the next part of this lecture we will be looking

at remedies for breach of contract. The lecture

will focus on:

1. Damages

2. Measure of Damages

3. Equitable Remedies for Breach of Contract

1. Damages

Damages are monetary compensation for

loss or damage arising from breach. The aim

is not to punish, but to compensate.

Damages are intended to put the innocent

party, so far as money can do it, in the

position in which he would have been in if the

contract had been performed. This includes

loss of profits which the innocent party would

have made if the contract had been

performed.

2. Measure of Damages

Limitations on the Damages Recoverable

a. Remoteness of Damage

b. Duty to Mitigate

c. Penalty Damage

d. Non Pecuniary Losses

a. Remoteness of Damages

Whether the resulting damage should be attributed to

a party is determined by a remoteness test; that is

the court will determine whether the possibility of

such damages occurring were reasonably

foreseeable by the person causing the damage.

Usual damage: might reasonably anticipate/in the

natural course of things – likely to be liable

Non-usual damage: circumstances not necessarily

known to other party – unlikely to be liable (too

remote)

Remoteness of Damages Contd.

Hadley v Baxendale [1843-60] All ER Rep 461

H owned a flourmill and in May the mill was stopped due to a

breakdown of the crankshaft (the only one it had). H was to send the

crankshaft to a third party for it to be replaced, B informed H that

delivery would be made the following day. However, delivery was

delayed seven days and this led to a loss of profits that H attempted to

recover. B argued that it had no knowledge that H would have sent

the only crankshaft and hence a delay would have completely stopped

production.

The court concluded that there had been a breach of contract, but

damages should be based on what may fairly and reasonably be

considered arising naturally from the breach. A complete cessation of

work due to the delay would have not been reasonably foreseeable by

B.

Remoteness of Damages Contd. As H sent its only crankshaft to be delivered by B, it

had an obligation to inform B of this fact and a delay

would have prevented any work being completed. B

would then have realised the consequences of any

delay – that is a total loss of business and

consequent loss of profits. This legal reasoning was

continued in: Victoria Laundry v. Newman Industries

[1949] 2 KB 528

In this latter case a delay in delivering an industrial

boiler for commercial launderers would allow

damages to be claimed for the subsequent lost

profits, but this did not extend to possible lucrative

contracts that could have been won had the boiler

been delivered as expected.

b. Duty to Mitigate

Duty to mitigate: injured party has duty to take all

reasonable steps to minimise their loss.

Where an innocent party has failed to mitigate

his/her losses following breach they may be

awarded nominal damages.

The award of nominal damages essentially reflects

that the claimant has „won‟ the case, but he/she

may not have acted reasonably in the

circumstances (see Brace v Calder [1895] 2 QB

253).

c. Penalty Damages

Liquidated damages occur when there is a provision

in contract stating in advance what damages will

have to be paid if a breach occurs.

Only enforced if genuine pre-estimate of loss.

Where the amount agreed is exorbitant and not a

genuine pre-estimate of the anticipated loss, the

courts will treat the agreement as a penalty and will

refuse to enforce it (see Dunlop Pneumatic Tyre

Company v New Garage and Motor Company [1915]

AC 79).

d. Non Pecuniary Loss Non pecuniary losses – for example,

damages for mental distress, hurt feelings,

disappointment, loss of reputation or loss of

amenity.

The General Rule

The traditional view of the courts when

determining the level of damages applicable

in such cases has been to ignore any injured

feelings or loss of enjoyment suffered (see

Addis v Gramophone [1909] AC 488). This is

due to the problem inherent in quantifying

such damages and the potential opening of

the floodgates for claimants.

Non Pecuniary Loss Contd. The Exceptions

There are 2 main exceptions to the general rule.

1. Damages for distress may be awarded where the

distress arises from physical inconvenience

caused by the breach of contract (e.g. see Watts v

Morrow [1991] 1 WLR 1421.

2. Damages for non-monetary losses such as mental

distress may be recovered in cases where the

main object of the contract was to provide

pleasure, relaxation and enjoyment. This is the

case, for example, with a contract for the provision

of a relaxing holiday.

Non Pecuniary Loss Contd

Although damages are awarded for non-

monetary losses in the case of these

exceptions, the amounts awarded as usually

very modest. The courts have stated that they

are not keen to see huge US-style awards for

non-monetary losses on this side of the

Atlantic

Jarvis v Swan Tours [1972] 3 WLR 954

Holiday to Switzerland. The whole purpose

of the contract was for pleasure, relaxation

and enjoyment.

Jarvis v Swan Tours [1972] 3 WLR 954

The plaintiff booked a winter holiday which

the defendants promised in their brochure

would be like a “house party”, with special

entertainment and proper facilities for skiing.

In fact the facilities were inadequate. In the

second week the “house party” consisted of

the claimant alone. The court awarded him

damages for the cost of the holiday and in

addition for the disappointment suffered and

the loss of entertainment he had been

promised in the brochure.

Mental Distress: Farley v Skinner [2001] UKHL 49;

[2002] 2 AC 732.

Aircraft Noise. House located 15miles from Gatwick

Airport. Surveyor asked whether house would be

affected by aircraft noise.

Farley v Skinner [2001] UKHL 49; [2002] 2 AC

732. In this case the claimant employed the defendant to survey a „gracious

country residence‟ which he wished to purchase. The House was

situated some 15 miles from Gatwick airport. Given its proximity to the

airport the claimant expressly asked the defendant to report on

whether or not aircraft noise was likely to be a problem.

The defendant stated that the noise was unlikely to be a problem,

„although some planes will inevitably cross the area, depending on the

direction of the wind positioning of the flight paths‟. The claimant

purchased the house. After he had spent more than £100,000 on

improvements to it, he discovered that the aircraft noise was a problem

and interfered with his enjoyment of the house.

The trial judge found that the defendant was in breach of contract and

awarded the claimant £10,000 for the distress and inconvenience

caused to him by the aircraft noise (the noise from the aircraft did not

affect the value of the property).

The House of Lords upheld the award (notwithstanding the fact that

the award was, in their view on the high side).

House of Lords Decision in Farley v Skinner [2001]

UKHL 49; [2002] 2 AC 732. Their Lordships did not engage in a radical overhaul of

this area of law. They accepted the traditional starting

point, namely that the law of contract does not

compensate a claimant for mere disappointment or

annoyance suffered as a result of the defendant‟s

breach of contract.

Prior to Farley v. Skinner the courts had recognised

that damages for mental distress could be awarded

firstly where the breach of contract caused physical

inconvenience and distress to the claimant (Watts v

Morrow). Secondly where the predominant object of the

contract was to obtain some mental satisfaction (Jarvis

v Swan Tours).

What the House of Lords did however was to expand

the scope of the exceptions to the general rule.

House of Lords Decision in Farley v Skinner [2001] UKHL

49; [2002] 2 AC 732. Contd.

The House of Lords expanded the scope of

liability in two respects.

1. They dispensed with the „predominant

object‟ test in the second exception. It

sufficed that the term broken was one was

which was known by both parties to be an

important term of the contract: whether the

contract as a whole was one to provide

peace of mind or not was not the decisive

factor.

House of Lords Decision in Farley v Skinner [2001]

UKHL 49; [2002] 2 AC 732. Contd. The claimant in Farley v. Skinner had specifically

asked the surveyor to report on the level of aircraft

noise. As Lord Clyde observed, it was „the specific

provision relating to the peacefulness of the property

in respect of the aircraft noise which makes the

present case out of the ordinary‟. In the absence of a

specific question to the surveyor, it would appear that

a surveyor will not ordinarily be liable to a house

purchaser for the disappointment or distress which he

suffers in the event that the House suffers from a

defect.

The elimination of the „predominant object test‟ may

result in a gradual but controlled expansion of the

ambit of liability for mental distress damages.

House of Lords Decision in Farley v Skinner

[2001] UKHL 49; [2002] 2 AC 732. Contd.

2. It was established in Farley that the claimant

can recover damages on the ground that the

defendant‟s breach of contract resulted in

inconvenience and discomfort for the plaintiff.

The Lords adopted a very broad view of

inconvenience and it was held that the noise

from the aeroplanes caused the claimant to

suffer „real discomfort‟, in that it interfered with

the enjoyment of his property.

House of Lords Decision in Farley v Skinner [2001]

UKHL 49; [2002] 2 AC 732. Contd

A finding that the noise interfered with the claimants use

of the property seems rather marginal in that no other

house owner appeared to suffer in the same way.

But the fact was that the noise did interfere with the

claimants: „quite reflective breakfast‟, „morning stroll in

the garden‟ and pre dinner drinks on the terrace all spoilt

by the noise.

There is a definitional problem here because it may not

always be easy to distinguish between inconvenience

which (which falls within the scope of this category) and

disappointment (which does not).

House of Lords Decision in Farley v Skinner

[2001] UKHL 49; [2002] 2 AC 732. Contd

It may be that the difference is that inconvenience affects the

senses. Lord Scott stated:

“If the cause is no more than disappointment that the contractual

obligation has been broken damages are not recoverable even if

the disappointment has led to a complete mental breakdown.

But if the cause of the inconvenience is discomfort or,sensory

(sight, touch, hearing smell etc) experience, damages can,

subject to the remoteness rules, be recovered.”

NB. For further discussion of Farley v Skinner see: E.McKendrick (2011) Contract

Law. (This forms part of the recommended reading for seminar 3 and you can

find the relevant extract on WebCT after the lecture.

3. Equitable Remedies for Breach of

Contract Equitable remedies are discretionary – this means

that the court is not obliged to grant them, but can

do so at its discretion if counsel makes a convincing

argument. The party claiming the equitable remedy

must show that:

Damages would not be an adequate remedy; and

They acted completely honestly. There is an

equitable maxim, or rule, that he who comes to

equity must come with clean hands.

Equitable Remedies for Breach of

Contract Contd. Equitable remedies for breach include:

a. Rescission – the court sets aside contract and

restores parties to pre-contractual position.

b. Specific performance – the court orders the

breaching party to perform their contractual

obligations. If the party continues to refuse after the

court order, it will be guilty of the criminal offence of

contempt of court.

c. Injunction – the court directs a party to refrain from

doing something that would act as a breach of the

contract (see: Warner Bros v Nelson [1937] 1 KB

209).

Overview: Remedies for Breach of Contract

1. Damages

2. Measure of Damages

Limitations on the Damages Recoverable

a. Remoteness of damage

b. Duty to Mitigate

c. Penalty Damages

d. Non Pecuniary Losses

3. Equitable Remedies for Breach of Contract

a. Rescission

b. Specific Performance

c. Injunction

Next Lecture:

Contract Lecture (4): Week 9 (wk/b 21st

November 2011): Terms/Content of a

Contract

Either: Tuesday (10-12: AW WG5); or,

Friday (4-6: Howarth 101).