Discharging obligation under contract Q2

Part V

Contracts which must be Performed

Agreement to do impossible act
57. (1) An agreement to do an act impossible in itself is void.[In this part, natural disaster, Act of GOD - like becomes insane or died, are usually the reasons for impossible act, thus frustration of contract performance - cannot perform the contract.]Contract to do act afterwards becoming impossible or unlawful
(2) A contract to do an act which, after the contract is made, becomes impossible, or by reason of some event which the promisor could not prevent, unlawful, becomes void when the act becomes impossible or unlawful.

Effect of novation, rescission and alteration of contract
63. If the parties to a contract agree to substitute a new contract for it, or to rescind or alter it, the original contract need not be performed.

ILLUSTRATIONS
(a) A owes money to B under a contract. It is agreed between A, B and C that B shall henceforth accept C as his debtor, instead of A. The old debt of A to B is at an end, and a new debt from C to B has been contracted.

(b) A owes B RM10,000. A enters into an arrangement with B, and gives B a mortgage of his (A’s) estate for RM5,000 in place of the debt of RM10,000. This is a new contract and extinguishes the old.

(c) A owes B RM1,000 under a contract. B owes C RM1,000. B orders A to credit C with RM1,000 in his books, but C does not assent to the agreement. B still owes C RM 1,000, and no new contract has been entered into.

The law of contracts forms a substantial part of our various relationships that can have some sort of influence over us on an almost daily basis – even when there is no physical contract in front of us we may still be privy to some sort of contractual obligation. Alternatively, if you’re a fan of social theorists such as Jean-Jacques Rousseau, you may argue that we’re also bound by ‘the social contract’, but we digress. Getting back to our original point, the law of contracts plays an enormous role in many of our interactions and for the most part, there may be no real concern in regards to the performance of a contract and an agreement will be completed accordingly. However, this does not mean that issues won’t arise within a contractual relationship, and there may be circumstances where you may need to discharge a contract which can be done by either one, or all of the parties to the agreement, and can be discharged by either:

• performance;
• agreement;
• subsequent agreement;
• operation of law;
• election after breach;
• frustration.

Before exploring the general ways in which a contract can be discharged, the most obvious way in which a contract will come to an end, is when all parties fulfil their contractual obligations and the contract has been discharged via performance. Easy.

Exceptions to performance

Some people may be of the belief that performance of a contract includes the executing of every aspect of the contract of which the parties had agreed upon, and if performance of every part of the agreement has not been fulfilled, then the contract has not been fully performed – which was essentially the position in Sumpter v Hedges [1898] 1 QB 673 in the English Court of Appeal, which was a matter where the plaintiff was contracted to erect certain buildings on the grounds of the defendant for a lump sum of 565 pounds, but the plaintiff was only able to do part of the work to a value of 333 pounds, with the defendant subsequently completing the rest of the work. As a result, the plaintiff sued on quantum meruit (as much as he or she has earned) appealing from the judgment of the trial judge who awarded the plaintiff for the value of the materials used, but nothing in respect to the work done.

The Court of Appeal upheld the trial judge’s decision and held that the plaintiff could not recover from the defendant in respect to the work done as part of quantum meruit due to the fact that the contract was for a lump sum, and there was no evidence that an agreement for part performance was formed.

As a result of the decision in Sumpter and other similar decisions, the common law had subsequently recognised some exceptions to the general rule other than that performance of a contract must be exact and complete according to the terms, with the exceptions being:

• substantial performance;
• acceptance of partial performance;
• divisible contracts;
• the law does not concern itself with trivialities (de minimis non curat lex);
• the performance of the contract has been obstructed;
• time for performance

Discharging of a contract by agreement

There is nothing preventing parties to a contractual relationship to vary or discharge the agreement, and can do so in the following ways:

Mutual discharge: is where both parties agree to release one another from what was agreed upon before either party has performed any of the acts promised.

Release by one party: is where one party has completed their contractual promise, and agrees to release the other party from further performance of the contract.

Novation: putting a new contract in place of the old one and can be done between the original contracting parties or different parties.

Merger of lesser agreement into a greater agreement: is where parties to a simple contract enter into a formal contract or deed, and the simple contract has been merged by the formal contract which has become enforceable. Merger may also operate in such a way where the obligations under the agreement will have the effect of discharge.

Discharge by accord and satisfaction: arises where one party is in breach of the contractual agreement and the other party agrees to release the party who is in breach by requiring performance of another promise, which would then mean that the previous agreement has been discharged by accord (the new promise) and satisfaction (performance).

Waiver of a contract: is where the strict performance of the contract is no longer required, even though strict performance of the contractual agreement can still be claimed by one of the parties.

How can a contract be discharged by operation of the law?

A contract may be discharged by operation of the law such as when the agreement is materially altered by one of the parties without the consent of the other, in which case, the innocent party may be able to treat the agreement as discharged due to the conduct of the other party.

Another way, in which a contract can be discharged, especially if the agreement relates to personal services, is the death of either party for example, thereby, having the effect of discharging the agreement.

How does a breach of contract discharge the agreement?Discharge of a breach of contract can be either through actual breach or anticipatory breach.
When a contract is discharged through a breach, usually means that one of the parties has either expressly or impliedly refused to perform their part of the contract.Actual breach: arises in circumstances where one party fails to perform their promise at the required time, or commits an actual breach of a condition of the contract (an essential term of the contract), and the breach of a condition will entitle the innocent party to terminate the contract and may allow the aggrieved party to claim damages.

The test when determining what a ‘condition’ of a contract is can be found in Tramways Advertising Pty Ltd v Luna Park (NSW) Ltd (1938) 38 SR where Jordan CJ said:

“The question whether a term in a contract is a condition or warranty, that is, an essential or inessential promise, depends upon the intention of the parties as appearing in or from the contract. The test of essentiality is whether it appears from the general nature of the contract, or from some particular term or terms, that the promise is of such importance to the promisee that he would not have entered into the contract unless he had been assured of a strict or substantial performance of the promise, as the case may be, and this ought to have been apparent to the promisor.”

It should be highlighted that a lesser promise which is referred to as a “warranty”, and if a breach of a warranty occurs, the breach does not give the option to the innocent party to terminate the contract.

Anticipatory breach: is when one party repudiates their obligation to perform a future promise and in such an instance, the innocent party may be entitled to terminate the contract and may bring an action for damages, irrespective of whether the date for performance has not yet arrived.

Discharge of a contract by frustration

There may be instances where performance of the contract is impossible and it isn’t the fault of any of the parties that there are no provisions dealing with a circumstance arisen, therefore, allowing the parties to be released from further performance of the contract.Frustration as a concept can be difficult to define and the test of frustration was stated by Lord Radcliffe in Davis Contractors Ltd v Fareham Urban District Council [1956] AC 696, and approved by the High Court of Australia in Codelfa Construction Pty Ltd v State Rail Authority of New South Wales (1982) 149 CLR 336.

Lord Radcliffe in reference to the test of frustration stated:

“…frustration occurs whenever the law recognises that without default of either party a contractual obligation has become incapable of being performed because the circumstances in which performance is called for would render it a thing radically different from that which was undertaken by the contract…it was not this that I promised to do.”

His Lordship further observed the importance in regards to unexpected events in terms of frustration by stating: “There must be as well such a change in the significance of the obligation that the thing undertaken would, if performed, be a different thing from that contracted for”.

Alternatively, there are three limitations to the doctrine of frustration:

• the frustrating event was not caused by either party to the contract;
• the frustrating event must not be one where it was reasonably foreseeable or contemplated by either party;
• the occurrence of the frustrating event was not caused by the party who is seeking to rely on frustration.

Under the common law, a contract which is frustrated automatically comes to an end, however, any liabilities prior to the frustrating event may still be enforceable – but in terms of future obligations (termination in futuro), the parties will be discharged.