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6.1.3 Agreement, Performance and Breach Lecture – Hands on Example

The following section will test how well you understand the content on discharge of obligations under a contract. This is mostly a case of being able to identify the different types of repudiatory breaches.

After studying the detailed chapter on discharge you should be able to identify the issues in these questions and apply the law correctly. The answers for the questions can be found at the very bottom of this page.

A question on discharge of obligations should be easily identifiable by the fact there will be a breach or purported breach. The question is likely to ask you if the innocent party can discharge their obligations under the contract. The below example should allow you to get a general idea of how questions involving discharge of a contract may appear.

When addressing an issue involving the discharge of a contract, this would be an appropriate method:

  • Is there an agreement to discharge the obligations under the contract?
  • Has the contract been fully performed so to discharge the obligations under the contract?
  • Has there been a breach of the contract?
  • If there has been a breach, will it amount to a repudiatory breach under one of the three categories (type of term, entire obligations or an anticipatory breach)?

This step-by-step approach will cover all of the potential discharges of obligations and ensure you do not miss one. You will need to have knowledge of the relevant legal principles and relevant cases once you manage to identify the relevant method of discharge.

Scenario

Claire owns a very successful ice-cream business, owning a number of stores over the country. She has formed a number of contracts which she is concerned about. She would like some advice on whether she has to continue under the contracts or might be able to opt out of them in some way.

  1. The first contract Claire has is with a supplier of industrial ice-cream machines for the opening of five new stores. The ice-cream machines are worth £10,000 each and this supplier is the only one in the country. Claire has ordered five of these machines but the supplier has only given her four, and has told her they do not have the fifth one.

What is the result of this breach of contract? Can Claire repudiate the whole contract? Ideally, Claire would like to keep the four machines.

  1. Claire is not particularly happy with the price of her leasehold agreement in her Nottingham store. After speaking to the owner of the store next to her, she has found out they are paying half the price that she is. After learning this, Claire wishes to attempt to discharge her obligations under the lease and renegotiate the price. After studying the contract, Claire has found a term which states ‘it is a condition of the contract that the property will be re-painted by the owner of the land before the tenancy starts’. The tenancy has started and the property was not re-painted.

Can Claire rely on the breach of this condition in order to discharge her obligations under the contract?

  1. Claire has a contract with John for the supply of ingredients for her ice cream. The contract runs for another six months, but both parties wish to discharge their obligations under the contract.

Can they do so, and if so, how should they go about this?

  1. This contract may be repudiated under the entire obligations rule, outlined by Cutter v Powell (1795) 6 TR 320 – the entire obligation of providing the five machines is necessary in order for Claire to pay them the full sum.

However, the courts are unwilling to apply this rule, and there are a few exceptions which the courts will apply. In this case, the substantial performance rule may be applicable. Where the extent to fail to perform is small in comparison to the performance the court will waive the entire obligation rule and prevent the repudiation of the contract.

In this case, as Claire wants to keep the four machines, it is best to argue the substantial performance rule. The case of Hoenig v Isaacs [1952] 2 All ER 176 confirms that Claire will be able to offset the price of payment against the loss, and would therefore only have to pay £10,000 for each of the four machines received. Four out of five machines is a substantial performance, despite the high value of the goods.

  1. If there is a breach in a contract of a condition, the innocent party may terminate the contract and release both parties from their obligations. Therefore, on the face of it, if a condition has been breached it seems like Claire can repudiate the contract.  However, the simple fact that a term has been classified as a condition does not always mean it is a condition. The case of Schuler AG v Wickman Machine Tool Sales Ltd [1973] UKHL 2, shows us that if a term classified as a ‘condition’ is inconsistent with the rest of the contract, it will not be a condition. On the facts of this case, we do not know if it is inconsistent with the rest of the contract, therefore it is likely to be classed as a condition.

The case of The Hansa Nord [1976] QB 44 rules that if a party relies on a trivial breach of a condition in order to repudiate the contract for an ulterior motive the term will not be classed as a condition. This seems to be the case here – the breach of not re-painting the store seems trivial, and Claire is attempting to repudiate the contract because she is unhappy with the price of the lease. Therefore Claire could not rely on the breach of condition to repudiate the contract.

  1. If the parties freely agree to a discharge, the contract can be discharged through agreement. There must be a secondary contract formed which agrees to discharge the first contract, and this secondary contract must have valid consideration (The Hannah Blumenthal [1983] 1 AC 854.

The parties will not need to supply consideration for the secondary contract under the normal way; the ‘mutual release exception’ will apply to the contract. Valid consideration is formed by the mutual abandonment of the obligations under the first contract.

Therefore, it is clear Claire and John can discharge their agreement by simply forming a secondary contract to discharge the first one.


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