Capacity to Contract Case Study and Discharge of Contract Reasons

This assignment consists of two parts. One part of the assignment is about a case study of Arun and Prakash V Beach Hotel. The case study mainly shows that Arun took the benefit of his age by not paying expenses of the hotel. The case study refers to the concept i.e. Capacity to contract. This part of the assignment will show Arun and Prakash capacity to the contract and rules under which the hotel has to recover its losses itself and also appropriate case laws will be given to understand it perfectly.

Second part of assignment comprises discharge of contract. In this part of the assignment I am going to elaborate on the four ways of contract that results in its discharge in which the most important way to discharge a contract is by breach of contract.

CAPACITY TO CONTRACT

Adams, (2008:166) says that:

The law protects some vulnerable classes of person by limiting the types of contract which fully bind them.

Case refers to the term Capacity to contract. According to the case Arun is under age and is incompetent to contract, so capacity of contract says:

A valid contract may be made by any person recognised by law as having legal personality, that is:

Natural persons:

In general, anybody over the age of 18, who, at the time, is sober and mentally unimpaired, is capable of contracting.

Companies:

They must do it through the agency of a human being.

The Crown (public authorities):

It is now generally possible to sue the Crown as of right for breach of contract.

Contract between the hotel and two friends is invalid as Arun is below 18 and does not mention his age.

INCOMPETANT TO CONTRACT

The following classes of persons in law are incompetent to contract, or are only capable of contracting to a limited extent or in a particular manner:

Insolvent companies

Minors

Persons of unsound mind

Alien enemies

Drunkards

Corporations

Companies

Partnerships

Receivers of companies

Provision

Following case study, it will discuss the following classes:

Minors

Drunkards

MINOR CAPACITY TO CONTRACT

According to the case study, Arun who booked the hotel is 16 years old which means that Arun comes under Minor capacity to contract.

MINOR

A person under the age of 18years (s1 Family Reform Act 1969). He becomes adult at the beginning of his 18th birthday i.e. at one minute past midnight.

Most contract with a minor are voidable at his option. This is to say, a minor –but not the other party –has the right not to be bound by the contract.

A ‘voidable contract’ is one which is initially valid, but where one or more of the parties (i.e. minor) has a right of election to avoid or to continue and so validate it. Unless and until a right of avoidance is exercised, a voidable contract remains valid; but, whilst the right of avoidance remains, it may be exercised whether the contract is executory or executed.

DRUNKARD CAPACITY TO CONTRACT

A contract is voidable by a party not certified a ‘patient’ if he can prove that:

He did not understand the general nature of what he was doing, and

His impairment was known to the other party.

Case study illustrates that Prakash is a drunker. He does not state this fact to the hotel and agreed with his minor friend Arun to stay in the hotel for two days.

According to the rule, the contract is void as Prakash does not prove his impairment to the other party before his friend booked the hotel. The following case law will describe it clearly.

Hart v O’Connor [1985] 1 AC 1000

Facts

Vendor sold trust property (a farm) to Hart. Vendor was 83 and of unsound mind, but Hart did not know this and was fair in his negotiations with Vendor’s solicitors.  Hart occupied and improved the land.  When one of the Vendor’s brothers (O’Connor) took over as trustee of the estate he sought to set aside the contract, according to the ‘Australian contract law’.

Held

The Court noted that if a person lacking mental capacity subsequently regains capacity (even temporarily) they may ratify a contract entered into when insane.

IMPAIREMENTS SHORT OF INCAPACITY

The Privy Council said in relation to above case Hart v. O’Connor (1985) that an insane person who appears sane can rely on the independent and separate ground of unconscionability which relieves abnormal mental weakness even short of incapacity.

CONTRACT CAPABLE OF BINDING A MINOR

Contracts to purchase necessaries are capable of binding a minor. According to the s 3 of the Sale of Goods Act 1979, ‘Necessaries’ are defined as ‘goods suitable to the condition in life of the minor and to his actual requirements at the time of sale and delivery’.

CONTRACT FOR NECESSARIES

Necessaries are those things a person immediately needs, such as food; drink; clothing; accommodation; medicines. Necessaries are not confined to those things which are absolutely required to keep him alive but they extend to all such things as are reasonably necessary for him in the station in life to which he belongs. They exclude luxuries, and also a surplus of- necessary items; e.g. a contract to buy two shirts would, probably, be binding but one for a dozen would not be.

Nash v Inman (1908)

Facts

The claimant supplied clothing to the defendant minor, a Cambridge undergraduate. The clothing included 11 fancy waistcoats.

Held

As the defendant was already amply supplied with clothing appropriate to his station in life the clothing purchased could not amount to necessaries and the action must fail.

(Adams, 2008:163)

Recommendation for Beach Hotel

This is demonstrated perfectly in the case of Nash v Inman, a minor, ordered eleven fancy waistcoats, but once they were made he refused to pay for them, simply saying he did not want them anymore. Nash, the waistcoat maker, could not sue Inman because having eleven waistcoats is not a necessity.

So, there is a clear advice for Beach Hotel that they could not sue Arun and Prakash because hotel did not establish that the bills were necessaries.

In this case Arun has an advantage of minor age as he hides his age from the hotel during paying deposit. On the other hand, Prakash also enjoys the benefits by hiding his habit of drinking. Therefore, Beach Hotel has to recover its losses itself despite the fact that Arun and Prakash have enough money to cover all debts and the hotel does not have a right according to the law to enforce Arun and Prakash to pay.

CONCLUSION

I have concluded that before signing a contract both parties must understand each and every term of the contract. If the contract is between two parties, then both parties should be aware of the concept ‘Capacity to Contract’ in order to avoid loss in the future. Like in Beach Hotel v Arun and Prakash case where the hotel was not aware of the fact that Arun was underage and Praksah was a drunker and recover their losses itself. Therefore, it is better to look at the capacity of the person to contract before entering into it.

DISCHARGE OF CONTRACT

Turner, (2001:98) says that “Discharge refers to the point where the contract is ended. This should be when all obligations are satisfactorily performed. However, in some circumstances not all obligations are performed but the contract is still considered to be discharged. When the contract is breached by one party the other party can consider their obligations discharged, and the party breaching the contract is then bound by new secondary obligations.”

WAYS TO DISCHARGE A CONTRACT

According to the Adams (2008:171) there are four ways in which a contract can be discharged:

Performance

Agreement

Frustration

Breach

DISCHARGE BY PERFORMANCE

Performance by both parties discharges the contract completely.

Performance of a contract by one party discharges him alone.

The general rule: parties must perform precisely all the terms of the contract in order to discharge their obligations.

Cutter v Powell (1795)

Facts

The defendant, Captain Powell, engaged Lieutenant Cutter as part of his crew for a voyage from Jamaica to Liverpool. The contract stated that payment was due only on completion of the voyage, but the Lieutenant died 19 days before the ship reached Liverpool.

Held

His widow, who sued on behalf of his estate, could not claim any part of his salary since payment of it was not due until the voyage had been completed when the entire obligation would have been discharged. Adams (2008:172)

RULE OF EXACT AND PRECISE PERFORMANCE

In contracts for the sale of goods, s 13 Sale of Goods Act 1979 imposes the condition that goods must match with the description. The precise requirement of s 13 was shown in the following case:

Re Moore and Landauer (1921)

Facts

Law teacher 2010 provides evidence to show that; There was an agreement for the sale of 3,000 tins of canned fruit packed in cases of 30 tins. When delivered it was discovered that half the cases contained only 24 tins although the total number of tins was still 3,000. The market value was not affected.

Decision/Outcome

The Court of Appeal held that notwithstanding that there was no loss to the buyer; he could reject the whole consignment because of the breach of s 13 of the Sale of Goods Act (goods must correspond with the description).

SUBSTANTIAL PERFORMANCE

Substantial performance also discharges a contract like a party who has substantially (though not precisely) performed his obligations can recover the contract price, reduced by damages awarded to the other party in respect of defects:

Dakin v lee (1916)

Facts

Law teacher 2010 states that; The defendants promised to build a house according to specification and failed to carry out exactly all the specifications, for example, concrete not four feet deep as specified, wrong joining of certain rolled steel joists and concrete not properly mixed.

Decision/Outcome

The Court of Appeal held that the builders were entitled to recover the contract price, less so much as ought to be allowed in respect of the items found to be defective. The case was one of negligence and bad workmanship and not a case where items in the specification had been omitted or the job abandoned.

DISCHARGE BY AGREEMENT

Adams (2008:174) says that “Having formed a contract, the parties to it may agree not to go through with it. This agreement (which is in effect a secondary contract) will be binding as long as the necessary requirements of a valid contract are satisfied. The issue most likely to be problematic is consideration.”

There are two ways to discharge by agreement;

Unilateral discharge

Bilateral discharge

UNILATERAL DISCHARGE

Unilateral discharge takes place where only one party has rights to surrender. Where one party has entirely performed his part of the agreement, he is no longer under obligations but has rights to compel the performance of the agreement by the other party.

For unilateral discharge, unless the agreement is under seal, consideration must be furnished in order to make the agreement enforceable, i.e. accord and satisfaction:

Accord is the agreement by which the obligation is discharged.

Satisfaction is the consideration which makes the agreement operative.

In unilateral discharge accord and satisfaction is:

Where one party has completely performed his or her obligations under the original contract and the other party wants to be released from their obligations, a promise by the first party to allow this is binding only if the other party promises some material benefit (consideration) in return. Such a transaction is described as accord and satisfaction.

A promise, to pay a sum of money, or to provide some other consideration in return for the other party giving up his or her rights, will immediately discharge the contract.

BILATERAL DISCHARGE

Bilateral discharge occurs whenever both parties to the contract have some right to surrender, e.g. where there has been non –performance by either party, or is partly performed by one or both parties.

The bilateral agreement by the parties to discharge their contract may be designed to have one of several effects:

Accord and Satisfaction

Rescission and Substitution

Variation

Wavier

ACCORD AND SATISFACTION

Where there is an agreement mutually to release the other form the obligations under the first agreement, there is an accord and satisfaction.

Central London property v High trees house (1947)

Facts

Law essays 2003-2010 provides details that: In this case High Trees House Ltd leased a block of flats for a rate of £25, 00 per year from the Central London Property Trust Ltd. Due to the war and the resultant heavy bombing of London, occupancy rates in the cite were drastically lower than normal. In January of 1940, High Trees made an agreement with Central London Property in writing to reduce the rent by 50%.

However, neither party stipulated the period for which this reduced was to apply. Over the next five years, High Trees paid the reduced rate while the flats began to fill and by 1945 the flats were full. Central London Property then sued for payment of the full rental costs from June 1945 onwards.

Held

Because it was understood between the parties that the reduction in rent was only a temporary measure because of rental difficulties brought about by war-time conditions, the lessor was so entitled to its claim. The full rent was payable from the time that the flats became fully occupied in mid-1945. It was also stated that if Central London had tried to claim for the full rent from 1940 onwards, they would not have been able to.

RESCISSION AND SUBSTITUTION

The parties may intend rescission of the original contract and substitution of a new contract. Case law is given below to understand rescission and substitution.

Berry v Berry (1999)

Facts

Turner, (2001:102) shows that; A husband and wife decided to go for divorce. At that time husband was working in some company and was earning a good salary and his wife claimed for maintenance which he agreed. After some period of time his salary dropped and was unable to pay the amount.

Held

An agreement was made that husband will reduce the amount as he pay before to her wife.

VARIATION

The parties may agree on the variation of an existing contract, i.e. modifying or altering the terms of the original agreement.

WAVIER

Where one party voluntarily accedes to a request by another to forebear his right to strict performance of the contract, or where he represents to another that he will not insist upon his right to strict performance of the contract, the court may held that he has waived his right to performance as initially contemplated by the parties. Usually there is no consideration.

DISCHARGE BY FRUSTRATION

Frustration in situations where it is established that due to subsequent change in circumstances, the contract is rendered impossible to perform, or it has become deprived of its commercial purpose by an event not due to the act or default of either party

Destruction of the essential object

Personal incapacity

Interference by the government

Non-occurrence of a specified event

Supervening Illegality

Delay

DESTRUCTION OF THE ESSENTIAL OBJECT

The destruction of the specific object essential for performance of the contract will frustrate it.

Taylor v Caldwell (1863)

Facts

In Law teacher 2010 it has been given that; Caldwell agreed to let a music hall to Taylor so that four concerts could be held there. Before the date of the first concert, the hall was destroyed by fire. Taylor claimed damages for Caldwell’s failure to make the premises available.

Held

The claim for breach of contract must fail since it had become impossible to fulfil. The contractual obligation was dependent upon the continued existence of a particular object.

Gamerco SA v ICM/Fair Warning(Agency) Ltd (1995)

Held

Adams, (2008:175) shows that; A contract under which the Guns N Roses band was going to perform was frustrated when the stadium where the concert was supposed to take place became unsafe and it was impossible to find another suitable venue in time.

PERSONAL INCAPACITY

Personal incapacity where the personality of one of the parties is significant may frustrate the contract:

Condor v The Baron Knights (1966)

Facts

E law resource 2009 shows that; A 16 year old agreed by contract to play the drums for the defendant band for 7 nights per week for 5 years. The claimant suffered a mental breakdown and was told by his doctor that he should not perform more than 4 nights per week. The band dismissed him. He brought a claim for wrongful dismissal.

Held

The claimant’s action was unsuccessful as his medical condition made it impossible for him to perform his contractual obligations and the contract was thus frustrated.

INTERFERENCE BY GOVERNMENT

This has often arisen in wartime due to the internment or conscription of personnel and requisitioning of property.

Morgan v Manser (1947)

In this case the conscription in wartime of a comedian frustrated his contract. At the point when he received his call-up papers there was no indication of how long hostilities would last. Adams, (2008:176)

NON-OCCURRENCE OF SPECIFIED EVENT

Here the letter of the contract can usually still be performed, but performance has become futile and in no way reflects the object which the parties intended to achieve.

Herne Bay Steamboat Co v Hutton (1903)

Facts: Adams, (2008:177) provides evidence to illustrate that; Hutton hired a boat to take a party of guests to view the fleet and watch the naval review on Edward VII’s coronation day but due to the postponement of the coronation the review was also cancelled.

Held: the contract was not frustrated since it was for two purposes only one of which had failed to happen. The fleet could still be toured.

SUPERVENING ILLEGALITY

A contract which is completely legal when formed may become illegal by a change in the law occurring before performance.

A contract may become frustrated if it later becomes illegal.

Denny, Mott & Dickinson v James Fraser (1944)

Facts

Law teacher 2010 shows that; A contract for the sale and purchase of timber contained an option to purchase a timber yard. By a wartime control order, trading under the agreement became illegal. One party wanted to exercise the option.

Held

the order had frustrated the contract so the option could not be exercised.

DELAY

Inordinate and unexpected delay may frustrate a contract. The problem is to know how long a party must wait before the delay can be said to be frustrating.

Davis Contractors v Fareham UDC [1956] AC 696

Facts

E law resource 2009 shows that; Davis Contractors agreed to build 78 houses for Fareham Council within 8 months for an agreed price of £85,000. Due to a shortage in skilled labour and material the contract took 22 months to complete and was much more expensive than anticipated. Davis Contractors were paid the contractually agreed price but bought an action arguing for more money based on the fact that the contract had become frustrated and therefore they were entitled to further payment based on a quantum merit basis.

Held

The contract was not frustrated. The fact that a contract becomes more difficult to perform or not so profitable is not sufficient to amount to frustration. It was still possible to perform the contract.

DISCHARGE BY BREACH

Breach of contract occurs where one of the parties of the agreement fails to comply, either completely or satisfactorily, with their obligations under it.

There are two types of breach:

Actual breach

Anticipatory breach

ACTUAL BREACH

Actual breach is where the breach occurs on the due date for performance.

ANTICIPATORY BREACH

Anticipatory breach occurs where, before the due date for performance, a party shows an intention not to perform his contractual obligations.

Anticipatory breach further has two types:

Express anticipatory breach

Implied anticipatory breach

EXPRESS ANTICIPATORY BREACH

Express anticipatory breach occurs where one of the parties declares, before the due date for performance, that they have no intention of carrying out their contractual obligations.

Hochster v De La Tour (1853)

Facts

The parties made a contract in April, under which the defendant agreed that the claimant should act as his courier on a foreign tour, due to begin on 1 June. On 11 May, the defendant informed the claimant that his services would not be required.

Held

The claimant could sue for damages immediately and he did not have to wait for the performance date. (Adams, 2008:184)

IMPLIED ANTICIPATORY BREACH

Implied anticipatory breach occurs where one of the parties does something which makes subsequent performance of their contractual undertaking impossible.

Omnium D’Enterprises v Sutherland (1919)

Facts

The defendant had agreed to hire a ship to the claimant but, before the hire period was to commence, he actually sold the ship to someone else.

Held

The sale of the ship amounted to a clear repudiation of the contract. The claimant could sue for breach from that date. (Adams 2008:183)

EFFECTS OF BREACH

Anticipatory breach does not automatically bring the contract to an end. The innocent party has two options:

Treat the contract as discharged and bring an action for damages immediately, without waiting for the contractual date of performance as in Hochster v De La Tour (1853)

Elect to treat the contract as still valid, complete his side of the bargain and then sue for payment by the other side as in White & Carter (Councils) v McGregor (1961).

White and Carter (Councils) v McGregor (1961)

Facts

Adams, (2008:185) states that; Mr McGregor, who owned a garage, was persuaded to advertise it through White’s advertising plates, which the company contracted to display on council litter bins for three years. McGregor’s obligation to pay arose only once the plates were installed. He attempted to cancel the contract the same day that he had made it, but the company refused to accept his repudiation.

Held

the company, having performed its obligations, was unable to claim full sum. As the company had not chosen to repudiate the contract, no duty to mitigate arose, i.e. the company was under no obligation to look for another advertiser so as to avoid losing money.

CONCLUSION

At the end, I would say that the best way of discharging a contract is based on performance. As in this way both parties follow all the terms of the contract and afterwards go for its discharge. On the other hand discharge by breach is the most unpleasant way to release yourself from duties. Therefore, discharge by breach results in damages too.