Methods of Discharging From a Contract

Discharge of a contract refers to the way in which it comes to an end. Contracts can come to an end in the following ways:

• by performance
• by agreement
• by frustration
• by breach

Each one of these methods of discharge will be considered.

Discharge by performance

The contract comes to an end when both parties perform their contractual obligations. Performance must substantially correspond with what the parties agreed allowing for minor or trivial defaults.

Discharge by agreement

The parties themselves can agree to end the contract, form a new contract or vary the original one.

Performance of a contract may be subject to a condition precedent allowing for discharge upon the failure of a certain event – e.g. in a contract for the sale of land where the purchaser has been unable to obtain finance.

A contract may contain a term that if some specified event occurs after the contract is formed then it may be terminated at the option of either or one of the parties. This is a condition subsequent e.g. the return of an item that is defective for a refund.

The parties may enter a new contract to end the old one. This is called novation. Obviously the new contract must satisfy all the usual rules for contractual formation.

The parties can also release each other from their remaining obligations – called release and discharge; or they may release each other from some of their obligations and retain or add others – called variation.

Discharge by frustration

A contract automatically comes to an end if it is discharged by frustration.

Four conditions must be satisfied for frustration to discharge a contract:

an unforeseeable event – something that the parties did not expect to happen and didn’t make provision for in the contract (See Study Guide p230);

that is no fault of either party – it must not be a self-induced impossibility as in Maratime National Fish v Ocean Trawlers (Study Guide p230);

that makes performance impossible – i.e. death of one of the parties where personal performance is necessary; destruction of the subject matter of the contract (as in Taylor v Caldwell – Graw 15.4.1); a change in the law making a previously legal contract illegal – e.g. contracts with enemy aliens (See Study Guide p228). The fact that the contract is more difficult or more expensive to perform is not sufficient (Contrast Cornish v Kanematsu – Study Guide p228 with Codelfa – Graw 15.4.5; );

or radically different than agreed– i.e. due to destruction of the object or purpose of the contract (as in Krell v Henry – Study Guide p229);

At common law where there has been frustration the loss lies where it falls – i.e. only obligations incurred prior to the frustrating event can be enforced – e.g. an existing liability to pay for goods whether or not delivered. Future obligations are unenforceable. Each party must suffer their own losses.

Under the SA Frustrated Contracts Act 1988 the losses are apportioned equally and equitably according to the formula set out in the Act. Each party’s contractual benefit is assessed against their contractual performance and an adjustment is made if necessary to restore the parties back to their original positions as far as possible.

Discharge by breach

Where one of the parties fails to perform their side of the contract the innocent party may be able to terminate the contract and commence proceedings for damages (or other appropriate remedy).

The effect of termination is to release both parties from future obligations, but not those that have already been incurred (e.g. the obligation to pay for goods received or work done); or that are intended to continue after the contract has come to an end (e.g. restraint of trade clauses in employment contracts).

Not all breaches entitle the innocent party to terminate the contract. It is only breaches of conditions (or essential terms) or fundamental breaches (of innominate terms) that allow for termination. Breaches of warranties (or minor terms) do not allow for termination, however, the innocent party is entitled to sue for damages.

Determining whether a term is a condition or warranty depends on the objective intention of the parties. Conditions are terms that go to the heart or root of the contract. They are terms of such importance that the innocent party would not have entered into the contract unless assured of a strict and literal performance of them – e.g. as in a contract for the sale of land where the conditions include the purchase price, the description of the property and settlement date. Warranties are terms of lesser importance – e.g. in the sale of a house the removal by the vendor of fixtures, that is, items that are intended to stay, such as the stove or built in wardrobes.

A fundamental breach refers to a breach of a term that is not a condition, but the consequences of the breach are so serious as to give the innocent party a right to terminate the contract – e.g. Baltic Shipping v Dillon (Graw 16.4.7). In this case it was a minor term of the contract between the cruise operators and the passengers that the ship would be seaworthy (although this would have been a major term between the cruise operators and the ship owners!) The term was breached with grave consequences. The passengers were entitled to terminate their contracts with the cruise operators and sue for damages.

Anticipatory (or repudiatory) breach

Where one party indicates that they are unwilling or unable to perform their side of the contract the innocent party has two choices:

to accept the other party’s repudiation, terminate the contract forthwith and commence legal proceedings for damages (or another appropriate remedy; – e.g. the purchaser of a property indicates to the vendor that they are unable to obtain finance to meet the settlement date;

to continue to perform the contract (affirm) and wait until the other party has breached the contract, then commence legal proceedings – e.g. the vendor of property waits until the purchaser breaches the settlement date then commences legal proceedings.

Termination for repudiatory breach releases the parties from all future obligations under the contract. A repudiatory breach can occur in relation to a condition or warranty.

If the innocent party does something which indicates their intention to affirm (or confirm) the contract, they cannot later terminate – e.g. a contract for the sale of land where the vendor knows that the purchaser is unable to meet the settlement date but is prepared to give the purchaser more time to obtain the necessary purchase price. The vendor cannot now terminate the contract and sue for damages.