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6.1.2 Agreement, Performance and Breach Lecture

Discharge by Agreement

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

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

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.

Forming a discharge 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 - ‘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.

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 - 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.

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. There are two different types of performance:

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

Strict contractual obligation

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 obligations will not have to result in a specific outcome; the obligation will be to perform to a standard.

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

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.

Repudiatory breaches

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?

The conduct must also be clear and unequivocal as to intent to abandon the contract. 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.

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
  1. Condition subsequent
  2. Condition precedent
  3. Condition
  1. Warranties
  2. 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. 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. 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.

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. 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. 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

BS & N Ltd v Micado Shipping Ltd (The ‘Seaflower’) [2001] 1 Lloyd’s Rep 341 - condition or an innominate term?

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

Express conditions refer to where a statute expressly states that a particular term or type of term is to be a condition.

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 - Arcos v EA Ronaasen & Son [1933] AC 470.

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.

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 - Bunge Corporation v Tradax Export SA Panama [1981] UKHL.

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? The term must simply highlight its importance to the contract.

The fourth 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 -  Samarenko v Dawn Hill House Ltd [2011] EWCA Civ 1445.

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 - The Hansa Nord [1976] QB 44.

A term that is not even included in the contract may be implied as a condition dependent on the commercial circumstances.

Entire obligations

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.

The entire obligations rule does not always apply to the payment of instalments. If the breach is not sufficiently serious, the other party will only be liable for damages - Section 31(2) SGA 1979.

If the entire obligations rule is not operative, a number of minor breaches could have the cumulative effect of a repudiatory breach - Rice v Great Yarmouth Borough Council [2003] TCLR 1.

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 - Sumpter v Hedges [1898] 1 QB 673.

Following the acceptance, an implied secondary contract is formed. This rule can only operate where the innocent party has no choice whether or not to accept the benefit - Sumpter v Hedges.

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.

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

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 - Yukong Line of Korea v Rendsburg Investments Corporation of Liberia [1996] 2 Lloyd’s Rep 604.

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.

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 - Alfred Toepfer International GmbH v Itex Itagrani Export SA [1993] 1 Lloyd’s Rep 360.

Eminence Property Developments Ltd v Heaney [2010] EWCA Civ 1168 - 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 - 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.

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.

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.

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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