Agreement, Performance and Breach Lecture

We have explored both the formation of the contract, and circumstances in which a formation of a contract can be invalid. The next two chapters will focus on circumstances which discharge a party to the contract from their obligations. This chapter will focus on discharge via agreement, performance and breach.

A discharge of obligations means that parties to the contract are no longer liable for any terms of the agreement, and no further promises may be enforced. Here are the three main ways this can occur:

1. Agreement - a mutual agreement that the contract is no longer binding on both parties
2. Performance - when both parties have performed all of their obligations under the contract
3. Breach - when the obligations under the contract have been breached

This chapter will discuss each of these three methods, aiming to build an understanding of exactly how and when they occur.

Discharge by Agreement

To discharge a contract through agreement there are two simple requirements:

1. The discharge is mutual
2. The consent is free

In other words, as long as both of the parties agree to discharge their obligations, they can do so freely. However, what happens if there is a subsequent change of heart by one party, and they wish to re-enforce their obligations? At that point, the contract may be re-enforced, as the agreement to discharge obligations has no legal grounds, despite it being a perfectly valid agreement. Therefore, it is recommended that parties form a second contract which binds both parties to their promise to discharge the obligations under the contract.

Forming a discharge agreement

As with any other form of binding legal agreement, in order to create a binding agreement to discharge obligations under a contract, there must be valid consideration - The Hannah Blumenthal [1983] 1 AC 854. There is an exception to the general rules of consideration in relation to discharge agreements, which is called the ‘Mutual release exception’.  The mutual release exception rules that in a discharge agreement, the mutual abandonment of obligations under a separate contract amounts to valid consideration.

Therefore, when agreeing to discharge obligations under a contract, a separate contract agreement to do so should be made. This will prevent either party from later enforcing the initial contract.

Where only one party’s obligations remain

There may be a situation in which one party has performed their obligations under the contract, and only one party’s obligations remain. Under these circumstances, a regular agreement to discharge obligations will not be valid or binding. The parties must enter into a binding release via a deed.

Agreement to replace obligations

Parties may also make an agreement similar to a discharge agreement, but instead of simply discharging the obligations, it also replaces those obligations with new ones under a separate contract. Similar to a discharge agreement, the actual mutual agreement itself will amount to valid consideration. The leading authority for this kind of agreement is Compagnie Noga D’Importation et D’Exportation v Abacha (No. 4) [2003] EWCA Civ 1100

Agreement to alter obligations

Parties may also only discharge certain parts of the contract, by severing the unwanted terms from the main contract, then either choosing to replace those terms or simply leave the contract without the removed terms. In order for a party to enforce such an alteration, there must be consideration for the discharge or variation of the obligation.

It should be noted that the consideration paid for the discharge of an obligation cannot be lesser than the sum due under the contract if it involves an agreement to pay a sum of money. In other words, part-payment of a debt is not valid consideration, as we have discussed in the consideration chapter (Pinnel’s Case (1602) 5 Co Rep 117a).

Discharge by Performance

In order to discharge a contract by performance, both the express and implied terms must be performed. Furthermore, the terms must be performed to the expected standard of performance. There are two different types of performance:

1. The strict contractual obligations
2. The qualified contractual obligations

Strict contractual obligation

A strict contractual obligation is a strict obligation which must be met. These obligations will usually use definitive words, such as must, or will, and will discuss a definite result, rather than an aim or a target. For example, A must do B.

Strict obligations must be fulfilled before a contract can be discharged for completed performance. Excuses as to why an obligation could not be fulfilled will not be sufficient.

Qualified contractual obligations

Qualified contractual obligations differ to strict obligations as they are not definitive. Qualified obligations will not have to result in a specific outcome; the obligation will be to perform to a standard. The most common example of a qualified obligation is to exercise reasonable care and skill.

Case in focus: Platform Funding Ltd v Bank of Scotland plc [2008] EWCA Civ 930

In this case, a surveyor was employed to inspect and value a property. The standard of care a surveyor is held to is to survey with the reasonable care and skill that others in the profession would do so. The surveyor surveyed the wrong house. There was therefore a question of whether this fell under a strict contractual obligation, or a qualified in relation to the standard of care.

The court held that the surveying of the correct property was a strict contractual undertaking, and it was not part of the reasonable care and skill qualified contractual obligation.

If you can identify that all of the contractual obligations have been met in full, the obligations under the contract may be discharged.

Discharge by breach

The final way in which contractual obligations can cease to exist is through a breach of contract. In order to gain a full understanding of this process, we will first explore what exactly amounts to a breach of contract.

Breach of contract

The general definition of a breach of contract is where there is a failure or refusal by one or both of the parties to perform one or all of the obligations imposed upon them under the contract. A breach of contract may also occur where one of the terms has been performed, but it has not been performed to the appropriate standard imposed by the contract. There may be lawful excuse for a breach of contract, which will be covered in the next chapter (the law of frustration).

A breach of contract will usually result in the innocent party seeking one of the various contractual remedies against the party who breached the contract. These will be discussed in depth in a later chapter, but include damages, injunctions, specific performance, repudiation, restitution and rescission. The secondary result of the breach can be the release of the parties from their contractual obligations, however, this is dependent on the nature of the breach and the term it relates to; there must be a ‘repudiatory’ breach.

Repudiatory breaches

A repudiatory breach can be defined as a breach of contract which deprives the other party of a substantial benefit under the contract.  There are some tests and presumptions in order to assess whether a certain breach will amount to repudiatory:

1. What type of term has been breached?
2. Are the obligations ‘entire’?
3. Has the party in breach indicated an intention to abandon the contractual obligations?

In order to identify a repudiatory breach you will need to have knowledge of all three of these tests, as one or all of these tests may apply to a breach of contract.

For something to amount to a repudiatory breach, the conduct must also be clear and unequivocal as to intent to abandon the contract, the simple fact that one party seems unlikely to meet their contractual obligations will not be sufficient. The case of Alfred Toepfer International GmbH v Itex Itagrani Export SA [1993] 1 Lloyd’s Rep 360 is authority for the general threshold as being: apparent, on the balance of probabilities, that the party cannot or will not perform their obligations.

The more recent case of Eminence Property Developments Ltd v Heaney [2010] EWCA Civ 1168 further developed this test: From the perspective of a reasonable person in the non-breaching party’s position, has the other party shown a clear intention to abandon and refuse to perform?

Type of term breached

The type of term breached can result in a presumption that the contract has been breached and thus releases both parties from their obligations. Therefore, one of the key parts of a question relating to breach of contract is to identify whether the term breached can be classed as one of these:

1. Conditions
   • Condition subsequent
   • Condition precedent
   • Condition
2. Warranties
3. Innominate terms

Contingent conditions

A Condition should first be distinguished from a condition precedent and a condition subsequent. Conditions precedent and subsequent are ‘contingent’ conditions. This means that there is no contractual obligation to ensure that the condition is met. Which therefore means a contract cannot be discharged for breach of a condition precedent or subsequent.

A condition precedent is a condition which must be met before to any contractual liability can incur. In other words, something that needs to happen before the contract begins. A common example of a condition precedent can be found in mortgage agreements. It will be usually be a condition precedent that the property is inspected to assess the value before the mortgages contractual obligations may arise. Another example is where a contract is formed on the basis of a certain event (Pym v Campbell (1856) 6 E & B 370).

A breach of a condition precedent is valid and will not usually result in any remedies so long as the parties do not prevent the occurrence of the condition precedent (Mackay v Dick (1881) 6 App Cas 251).

A condition subsequent is a condition which will terminate the existing contractual obligations. The most commonly cited example is an employment contract which is for a fixed period. Once the condition subsequent is met (eg. a 6 month period), the contractual obligations cease.

Conditions

A condition is a term which is central to the contract. When attempting to identify a condition, the question to ask yourself would be: if this term was breached, would the whole nature of the contract change?

If a condition is breached, the innocent party has a choice to do one of two things:

1. Affirm the breach of contract, and continue to be party to the contract
2. Terminate the contract, which releases both parties from all of the obligations under the contract

Warranties

A warranty is a term which is not central to the contract. In contrast to a condition, if a warranty is breached, it would not change the nature of the contract. In other words, a warranty is peripheral to the main contract, and would not have serious consequences if breached. Therefore, a breach of a warranty will not result in an option to terminate the contract. A breach of warranty can be adequately compensated for with damages.

Innominate terms

An innominate term is somewhere between a condition and a warranty; a breach would not change the nature of the contract, but it cannot be said to be peripheral or a minor breach (Helpful!). The result of a breach of an innominate term will be dependent on exactly how the breach has occurred and the seriousness of the breach in those circumstances. If the breach is more serious, it is likely the innocent party will be given the option to repudiate the contract. If the breach is less serious, the only available remedy will be damages.

Breach of condition v serious breach of innominate term

I’m sure you will have read the above differences between the types of terms and wondered how on earth you will be able to tell the difference between a breach of condition and a serious breach of an innominate term! Thankfully there is some guidance under the common law.

Case in focus: Hong Kong Fir Shipping Ltd v Kisen Kaisha Ltd (1962) EWCA Civ 7

In this case, Hong Kong Fir hired a ship to Kisen for two years. One of the terms in the agreement was that the ship would be seaworthy and “in every way fitted for ordinary cargo service”. Unfortunately, the ship’s crew, machinery and engineer were not satisfactory. Kisen argued that these issues breached the condition that the ship would be seaworthy, meaning the contract was repudiated. Hong Kong Fir’s response was that this was not a breach of a condition, and therefore Kisen were in breach for repudiating the contract wrongfully.

The court held that the term breached was innominate. The unseaworthiness of the ship resulted in the ship being unusable for 80% of the period of hire, and therefore this was adequately remedied with damages. The nature of the contract had not changed, it was just that the ship was only ‘seaworthy’ for a shorter time than was expected.

The case of BS & N Ltd v Micado Shipping Ltd (The ‘Seaflower’) [2001] 1 Lloyd’s Rep 341 identified four categories or rules which can help classify a term as a condition or an innominate term.

1. Express conditions
2. Condition by precedent
3. Designated by contract or consequences
4. Nature of the contract

The first of these categories is the most obvious and easy to identify. Express conditions refer to where a statute expressly states that a particular term or type of term is to be a condition. The most common example of an express condition are the terms implied into certain contracts by the Sale of Goods Act 1979. Section 12(5A) states ‘the term implied by subsection (1) above is a condition and the terms implied by subsections (2), (4) and (5) above are warranties’. Here you have some express statements which leave no doubt as to which parts of the section are warranties.

Where a statute expressly classifies a certain term as a condition, it is irrelevant if the breach is extremely trivial and has little or no impact, the fact that statute has classified it as a condition means a breach will result in a valid repudiation of the contract. In the case of Arcos v EA Ronaasen & Son [1933] AC 470, there was a contract to purchase some staves sold by description. The staves were described as being half an inch thick. When the buyer received the goods, they were actually 9/16ths of an inch thick. This breached the implied term that goods sold my description will comply with the description from Section 14(2) of the Sale of Goods Act 1979. As this term is classified as a condition by statute, the buyer was able to repudiate the contract for breach of a condition, despite the small and potentially trivial difference in the staves.

The second rule is that where a certain term has been previously categorised as a condition in another judicial decision, the term should be treated as a condition. This may seem like it would be impossible in practice, but the fact that many commercial contracts use standard contractual terms means that this is an efficient method of categorising terms.

The court will not usually categorise the exact wording of a term as a condition, but more so the idea and aim of the term. In Bunge Corporation v Tradax Export SA Panama [1981] UKHL 11 it was decided that an obligation of ‘notice of readiness’ in relation to the loading of a shipping vessel was a condition. Therefore, regardless of the wording of the term, any breach of the requirement to give a notice of readiness in that context will amount to a condition.

The third rule is that a term will be a condition if it is designated so in the contract or the contract states the consequence of a breach of the term will be that the innocent party may repudiate the contract. In order for this rule to operate, it must be express and very clear that this was the intention of the parties.

The simple use of the word ‘condition’ will not usually be enough. The term defined as a condition must be considered in the context of the whole contract - is it consistent with the rest of the terms?

Case in focus: Schuler AG v Wickman Machine Tool Sales Ltd [1973] UKHL 2

In this case, clause seven of the contract was stated to be a condition. However, clause eleven of the contract stated either party could terminate the contract if there was a material breach of any term. Clause seven was breached, but not in a material way, which meant clause eleven was not effective.

It was held that clause seven being defined as a ‘condition’ was inconsistent with clause eleven, as surely for clause seven to be a condition it should have been a material term, and would therefore fall under clause eleven. Therefore, clause seven was not treated as a condition because of inconsistency with the rest of the contract.

On the flipside, sometimes the term does not even have to make reference to it being a condition or the consequences of its breach. The term must simply highlight its importance to the contract. For example, the phrase ‘time is of the essence’ is considered a condition, as it highlights the importance of keeping to the timings stipulated by the contract.

The fourth and final rule is that a term is a condition where the nature of the contract, subject matter or the circumstances of the contract imply that a breach of the term would obviously mean that the innocent party could discharge their obligations under the contract.

The courts will consider the importance of the term in the context of the contract as a whole. In Samarenko v Dawn Hill House Ltd [2011] EWCA Civ 1445 a term which required a purchaser to pay a deposit for a property following planning permission being obtained was held to be a condition. The court decided that a deposit was of such importance that is was obvious that the innocent party should be allowed to repudiate the contract if the deposit was not paid.

If the innocent party relies on a trivial breach in order to repudiate the contract for an ulterior motive, the breached term is treated as an innominate term. In The Hansa Nord [1976] QB 44 there was a contract for the sale of animal feed pellets. The pellets were damaged on arrival, but were still fit for their purpose of feeding animals. The buyer attempted to repudiate the contract on the grounds that the pellets were damaged, when in fact their motive was the fact the market value for the pellets had dropped. The courts were therefore unwilling to treat the term relating to the condition of the pellets as a condition, as it was not of true importance in the context of the contract as a whole.

A term that is not even included in the contract may be implied as a condition dependent on the commercial circumstances. An example of this would be a sale of goods that have a volatile market value. It may be implied into the contract that the time for performance is a condition.

Entire obligations

An entire obligation is an obligation that is necessary in order for the other party to perform their obligations under the contract. If an entire obligation is not completed this will constitute a repudiatory breach, allowing the innocent party to terminate the contract.

Case in focus: Cutter v Powell (1795) 6 TR 320

In this case, a sailor was hired for a voyage from Jamaica to England. The hire price was above the normal market value, and would be paid once the voyage was complete. The sailor died before the voyage was complete, and his wife attempted to claim some of the sum for the partial completion of the voyage.

The court held that the completion of the voyage was an entire obligation, which meant he could only be paid once he had completed the entire journey - which he did not. This case highlights how harsh the entire obligations rule may be. Failing to perform an entire obligation will prevent the other party from claiming any payment for the partial performance.

The courts have identified the harshness of the entire obligations rule, and in response have attempted to avoid applying the rule. The first way in which the courts will do this is by treating contracts as a number of smaller, separate contractual obligations. Take for example a contract for the construction of a building, there will be many stages of the construction, but it could be treated as an entire obligation. The courts will therefore separate the construction contract into stages and separate obligations, and if the entire obligation is not complete, the party can be paid for the parts they did complete.

The entire obligations rule does not always apply to the payment of instalments. The courts will assess what exactly the instalment was for; if that part of the contract amounts to a sufficiently serious breach, the contract may be repudiated. If the breach is not sufficiently serious, the other party will only be liable for damages. In the context of the sale of goods, Section 31(2) of the Sale of Goods Act 1979 explicitly refers to this exact rule.

If the entire obligations rule is not operative, a number of minor breaches could have the cumulative effect of a repudiatory breach. In the case of Rice v Great Yarmouth Borough Council [2003] TCLR 1, there were a number of breaches that could not themselves be considered repudiatory, but due to the consistency of the breaches, they were treated as amounting to a repudiatory breach. The consistent breaches meant the innocent party was substantially deprived of the benefit of the contract.

The courts may also waive the entire benefit rule where the innocent party accepts the partial performance and opts to keep any benefit derived from it. The case of Sumpter v Hedges [1898] 1 QB 673 shows this rule in operation. In this case, a contract to build two houses was formed for a price of £565. The builder abandoned the project after half the work was completed, and he was partially paid for the work. The innocent party completed the project himself. The fact the builder had been partially paid implied an acceptance of the breach by the innocent party.

Following the acceptance, an implied secondary contract is formed, which is essentially a contract to repudiate the first contract, and create a new one for payment of the partial completion. This rule can only operate where the innocent party has no choice whether or not to accept the benefit. In Sumpter v Hedges, the innocent party could not have opted to destroy the building and the builder could not recover everything for his partial performance of the building. Therefore, a contract for partial performance was possible.

The final circumstance in which the entire obligation rule will not apply is where the performance is substantial. If the extent of the failure to perform is small in comparison to the performance they have undertaken, the courts have been willing to waive the entire obligation rule and prevent the innocent party from repudiating the contract.

A clear example would be a contract for the sale of a quantity of goods. If the seller only manages to provide 999 of the 1000 goods, would this amount to substantial performance? If the goods were of a relatively low value, such as apples, this would amount to substantial performance.

The innocent party will however be able to claim damages, or offset the price of payment against the extent of the breach (Hoenig v Isaacs [1952] 2 All ER 176). So in the above example, the price would be offset by the cost of the one missing apple.

In order to assess whether the performance is substantial enough, the seriousness of the breach should be considered in the context of the contract as a whole.

Intention to breach - anticipatory breaches

Obligations under a contract may be discharged even before a breach has occurred if one party indicates an intention to breach the contract. This is referred to as an ‘anticipatory breach’. This type of breach was first identified in Yukong Line of Korea v Rendsburg Investments Corporation of Liberia [1996] 2 Lloyd’s Rep 604. Moore-Bick J explained that if one party intends to breach the contract, the other can treat it as a breach in anticipation and can discharge the contract immediately.

Case in focus: Hochster v De La Tour (1853) 2 E & B 678

In this case, the defendant employed the plaintiff as a courier for three months. The defendant had a subsequent change of mind and told the plaintiff he would not be required. The plaintiff claimed that this was a breach of contract, but the defendant claimed that there could not have been a breach since the contract of employment had not yet started.

The court held that this amounted to an anticipatory breach, and the defendant could choose to either claim damages immediately for the anticipatory breach, or wait until the date the contract should start and claim damages for the actual breach.

The anticipatory breach rule is justified by the fact that the innocent party will be aware the other party intends to breach the contract, but can do nothing about it and will have to wait until the breach actually occurs before they may claim for damages or repudiate the contract. The anticipatory breach rule gives the innocent party a remedy as early as possible.

As with all circumstances under which a contract may be repudiated, the breach intended must be sufficiently serious. In order to assess the seriousness of the breach you should consider the points covered earlier in the chapter.

A party can show their intention to breach the contract through an express statement, but the intention may also be inferred from certain conduct. The conduct must also be clear and unequivocal as to intent to abandon the contract, the simple fact that one party seems unlikely to meet their contractual obligations will not be sufficient. The case of Alfred Toepfer International GmbH v Itex Itagrani Export SA [1993] 1 Lloyd’s Rep 360 is authority for the general threshold as being: apparent, on the balance of probabilities, that the party cannot or will not perform their obligations.

The more recent case of Eminence Property Developments Ltd v Heaney [2010] EWCA Civ 1168 further developed this test: From the perspective of a reasonable person in the non-breaching party’s position, has the other party shown a clear intention to abandon and refuse to perform?

The innocent party can choose to repudiate the contract, or affirm the intended breach, as shown in Fercometal SARL v Mediterranean Shipping Co. SA [1989] AC 788. However, there are some limitations on the innocent party’s ability to affirm the breach.

In White & Carter (Councils) Ltd v McGregor [1962] AC 413 it was confirmed that a person who had no legitimate interest, financial or otherwise, in performing the contract, could not affirm a contract for an anticipatory breach.

The affirmation of an anticipatory breach must be clear and unequivocal, and there must be evidence to this effect (Yukong Line Ltd of Korea v Rendsburg Investments Corporation of Liberia [1996] 2 Lloyd’s Rep 604). The reason for this is that the affirmation of an anticipatory breach is irrevocable under most circumstances.

The case of Stocznia Gdanska SA v Latvian Shipping Co [2001] 1 Lloyd’s Rep 537 identified one situation in which an affirmation of breach can be revoked. Only when the breach is a continuing one may the innocent party revoke a previous affirmation of the breach. The innocent party can also repudiate the contract when the actual breach occurs, even if they had previously affirmed the anticipation of it.

Where an innocent party intends to terminate the contract as a result of the anticipated breach, they must make it clear to the party in breach that they are terminating the contract. Vitol SA v Norelf Ltd, The Santa Clare [1996] AC 800 confirms that one way in which the innocent party may inform the party in breach of this intention is simply by not performing any of their contractual obligations. However, this is not always the case and it is a question of fact in each different case. In most cases, it will be best for the innocent party to inform the party in breach directly.

The final point with regards to an anticipatory breach is that damages can be claimed from the date of the termination of the contract. The innocent party does not need to wait until the date of the supposed performance of the contract (Hochster v De La Tour (1853) 2 E & B 678).

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