Discharge of Contract

Understanding the Discharge of Contract Definition

There are several ways in which a contract can be discharged:

• Discharge by performance and agreement
• Discharge by operation of law
• Discharge by frustration
• Discharge by breach

Discharge by Performance and Agreement

Discharge by performance occurs when both parties have fully completed their contractual obligations. This is the most straightforward and common method of discharging a contract. In some cases, parties may also agree to alter, suspend, or terminate their obligations under a contract. This type of discharge is known as discharge by agreement.

There are several different types of discharge by agreement, including:

• Novation – This involves the substitution of a new contract for the existing one, e.g., substituting a new debtor or creditor, or changing the nature of the contractual obligations.
• Rescission – This nullifies the original contract as though it never existed. This process can be carried out by mutual consent, or by one party if the other party has breached the terms of the contract.
• Variation – The parties agree to modify the original contract, for example, by agreeing to different terms or conditions.
• Accord and satisfaction – This occurs when the parties agree to a new form of compensation for the outstanding obligations, effectively discharging the original contract.

Discharge by Operation of Law

In certain cases, a contract can be discharged by operation of law, which means that the contract is discharged due to certain legal requirements or provisions, rather than by the actions of the parties themselves. A few common examples of discharge by operation of law include:

• Mergers – When two companies merge, their existing contracts can be discharged by operation of law.
• Frustration – A contract can be discharged due to a change in circumstances that renders performance impossible or illegal.
• Bankruptcy – The discharge of a debtor's obligations by the operation of bankruptcy law often results in the discharge of the contract as well.
• Statute of limitations – A contract may be discharged due to the expiration of a legal time limit for enforcing the contractual obligations.

Four Ways of Discharging a Contract

As mentioned earlier, there are four primary ways of discharging a contract: discharge by performance and agreement, discharge by operation of law, discharge by frustration, and discharge by breach. In the following sections, we will delve into detail about discharge by breach and discharge by frustration, examining the different types of breaches and the various circumstances that can lead to frustration.

Discharge by Breach of Contract

A breach of contract occurs when one party fails to perform their obligations as per the terms of the contract, thereby discharging the other party's obligations under the contract. There are two main types of breach: anticipatory breach and actual breach.

Anticipatory Breach

Anticipatory breach, also known as repudiatory breach, occurs when one party indicates, either through their words or actions, that they will not be performing their contractual obligations before the time for performance has arrived. This can take various forms, such as:

• Express repudiation – One party explicitly states that they do not intend to perform their obligations under the contract
• Implied repudiation – One party takes actions that clearly demonstrate their intention not to perform, even without an explicit statement

Upon an anticipatory breach, the non-breaching party has two options:

1. Accept the breach and treat the contract as discharged, allowing them to sue for damages immediately; or
2. Continue to insist on performance and wait until the time for performance has passed before claiming damages and treating the contract as discharged

Actual Breach

An actual breach occurs when a party fails to perform their contractual obligations at the time specified in the contract. This could involve:

• Failing to complete the agreed-upon work
• Providing a substandard service or product
• Not delivering goods on time, or at all
• Failing to make payment as agreed

Upon an actual breach, the non-breaching party can treat the contract as discharged and claim damages for the breach.

Discharge of a Contract by Frustration

Frustration is a legal doctrine that discharges a contract when an unforeseen event occurs, making it impossible or fundamentally altering the nature of the contractual obligations. In this section, we will explore the circumstances that can lead to frustration and the legal consequences that may arise as a result.

Circumstances leading to Frustration

Various circumstances may render a contract impossible or fundamentally changed, leading to frustration. Some examples include:

• Physical impossibility – When something integral to the performance of the contract is destroyed or ceases to exist, e.g., a building rented for an event is destroyed by a fire.
• Legal impossibility – When a change in the law renders performance illegal or prohibited, e.g., new environmental regulations prevent a contracted construction project from going ahead.
• Non-occurrence of a specified event – When a contract is predicated on the occurrence of a particular event that does not happen, e.g., a contract to exhibit artwork at a gallery that never opens.
• Personal incapacity – When the performance of the contract depends on a specific individual, and they become incapacitated or unable to perform their obligations, e.g., an actor is injured and unable to perform in a play.

Frustration cannot be claimed if the event was foreseeable, the party claiming frustration was at fault in causing the event, or if the contract contains a clause allocating the risk to one of the parties.

Legal Consequences of Frustration

When a contract is discharged by frustration, the legal consequences can include:

• All parties are discharged from their future obligations under the contract
• Any sums paid or benefits conferred before the frustrating event may be recoverable, as per the Law Reform (Frustrated Contracts) Act 1943 in the UK
• Unrecoverable expenses incurred before the frustrating event typically remain with the party who incurred them
• In some cases, courts may allocate the ensuing losses between the parties, depending on the circumstances and the contract's terms

When a contract is discharged by frustration, it is vital for the involved parties to seek legal advice to clarify their rights and obligations in light of these legal consequences.

Discharge of Contract Examples

In this section, we will dive into real-life examples of contract discharge, focusing on cases where the discharge of a contract occurs due to breach or frustration. These examples illustrate how the concepts covered in previous sections are applied in practice and provide a deeper understanding of the discharge of a contract in real-life scenarios.

Real-Life Cases of Discharge by Breach

In each case, we will examine the circumstances surrounding the breach, the legal consequences, and the remedies awarded to the aggrieved party.

Case 1: Kempton Steamship Co Ltd v Byrne & Co Ltd

In this case, Byrne, a ship owner, agreed to let their ship Delight to Kempton Steamship Co Ltd. Despite having ample time, Byrne failed to provide the necessary documents for the voyage, which led to a delay in the ship's departure. Consequently, Kempton Steamship Co Ltd claimed a breach of contract.

Case 2: Hochster v De La Tour

In this case, De La Tour agreed to hire Hochster as a tour guide for an upcoming excursion. However, a month before the trip, De La Tour notified Hochster that he no longer required his services. Hochster claimed an anticipatory breach of contract.

Instances of Discharge by Frustration

Here, we will look at instances where a contract was discharged due to frustration, examining the circumstances that led to the frustrating event and the legal consequences for the involved parties.

Case 1: Taylor v Caldwell

In this case, Taylor agreed to rent a music hall owned by Caldwell for holding a series of concerts. Before the concerts could take place, the music hall was destroyed by fire. Taylor claimed compensation for the loss of expected revenue from the concerts.

Case 2: Krell v Henry

Krell rented out his flat to Henry, intending for the latter to use it to watch a military parade during the coronation procession of King Edward VII. However, the coronation ceremony was postponed due to the King's illness. As a result, the parade did not take place, and Henry refused to pay the rent for the flat.

These cases demonstrate the various circumstances in which a contract can be discharged due to breach or frustration. It is essential to understand these examples to grasp the practical implications of the principles discussed in previous sections, and to appreciate the multi-faceted nature of contract discharge in real-life situations.