LECTURE 16

DISCHARGE BY AGREEMENT AND PERFORMANCE

INTRODUCTION

Discharge in the law of contract means treating the contract as if there are no
obligations outstanding under it. In such a case, parties are no longer under any
obligation to fulfill the terms of the contract. A contract may be discharged in 4
ways:

(a) By agreement;
(b) By performance;
(c) By breach;
(d) By frustration

DISCHARGE BY AGREEMENT

Contracts may be discharged by express agreement. If both parties decide that

neither of them wishes to carry on with a contract which contains continuing
obligations, or in relation to which some parts are still executory, they may agree
to bring it to an end early. In the same way that agreements may be created by
agreement, they may be discharged by agreement. However, in order for the
agreement to discharge to be binding, consideration is necessary.

If the contract is wholly executory (meaning the parties both have obligations yet
to fulfill) then there is no problem with consideration as both parties surrender
their rights under the contract.

However, if the contact is partly executed i.e. one party has completed his
performance under the contract, in order to make the agreement to discharge
binding, there must be a deed (release) or new consideration (accord and
satisfaction).

DISCHARGE BY PERFORMANCE

Often times parties have done all that they are bound to do under a contract so
all ‘primary’ obligations under the contract will cease. There are however, in
some cases continuing secondary obligations. One example arises where there
is an obligation to pay compensation if goods turn out to be defective after sale
and delivery. There are legal rules governing whether the performance in
delivering the goods discharges the contract.

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These rules state that (a) performance must be precise and exact, (b) time is not
the essence for performance of a contract and (c) if one tenders performance
and it is rejected, then a breach of contract arises.

I. Performance must be precise and exact

The general rule is that performance must be exact and precise. This principle is
applied strictly by the Courts. In Re Moore & Landauer, D agreed to buy from P
3,000 tins of canned fruit. The fruit was to be packed in cases of 30 tins. When
the goods were delivered, a substantial part of the shipment was packed in cases
of 24 tins. The Court determined that this did not constitute satisfactory
performance. As such D was entitled to reject the whole consignment. The
contract had not been discharged by performance.

In Arcos v EA Ronaasen, the buyer had ordered timber for the purpose of
making barrels. The contract description said that they should be ½ inch thick.
Most of the shipment comprised of 9/16 inch thick timber. What do you think the
Court determined? Although the timber was perfectly usable for making barrels,
the Court determined that the buyer was entitled to reject the shipment. The
Court found that the seller had not performed the contract satisfactorily and
therefore had not discharged its obligations under the contract.

In the Privy Council decision in Union Eagle Ltd. v Golden Achievement, there
was a contract for the sale of a flat. The time for the performance was ‘made of
the essence’ and the purchase price was to be tendered by 5 p.m. on a particular
day. The purchase price was tendered at 5:10 p.m. on the particular day. The
Privy Council confirmed that the tender of performance did not discharge the
contract. This therefore entitled the seller to repudiate the agreement and retain
the deposit which had been paid. This appears to be a harsh decision but the
law requires that in order for performance to discharge a contract that such
performance be precise and exact.

Partial provision of services

In sale of goods and services cases, the failure to meet the terms of the contract
prevents a seller from claiming any compensation, even in relation to goods and
services which did match the contractual description. In such cases, the buyer
was entitled to withhold performance (the payment price) because the seller had
failed in its obligations. Once again, this rule operates rather harshly.

In Cutter v Powell, D agreed with a ship’s engineer to sail a ship from Jamaica
to Liverpool. The ship’s engineer died during the voyage. A majority of the
voyage was complete. The widow of the ship’s engineer sued to recover wages
for work carried out before his death. The widow’s action failed. The Court
interpreted this as an ‘entire’ contract for a lump sum. Nothing was therefore
payable until the entire contract was completed. So even though D had obtained
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the benefit of the ship’s engineer’s labour for the majority of the journey, no
compensation for this was recoverable.

With ‘entire’ contracts, nothing is payable until the contract has been fully
completed.

Divisible contracts or obligations

The rule on ‘entire’ contracts can operate rather harshly. As such, one way to
lessen the effect of this rule is to divide the work to be done into sections so that
upon the completion of sections, this gives rise to a right to some payment. In
Bolton v Mahadeva, there was a contract to (a) install a central heating system
and (b) supply a bathroom suite. The central heating system turned out to be
defective and there was no obligation to pay for this. However, the bathroom
suite was severable and an appropriate proportion of the contract price was
recoverable in relation to this obligation. This constitutes a softening of the
general rule that performance must be exact.

Non-performance due to the other party

If one party prevents the other from completing the obligations under an ‘entire’
contract, the party who has partly performed will be able to recover on a quantum
meruit basis for the work completed. In Planché v Colburn P contracted with D
to write a book for a series at the price of £100. D cancelled the series before P
completed the book. P recovered £50 towards the work he had done in writing
the book. This was recovery on a quantum meruit basis.

Acceptance of partial performance

If a party accepts partial performance, this may be sufficient in certain

circumstances to discharge the other party’s further obligations under the
contract, and to allow that party to sue on a quantum meruit basis for work
already done. This is an exception to the general rule that performance must be
exact and precise.

In Christy v Row, there was a contract to carry coal from Shields to Hamburg.
The coal was delivered to Gluckstadt by arrangement with the contracting party.
Gluckstadt was between Shields and Hamburg. The carrier successfully sued to
recover the cost of carriage to Gluckstadt.

This rule does not apply if the party effectively has no option but to accept the
partial performance. In Sumpter v Hedges, P, a builder, contracted to build 2

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houses and stables on D’s land for £565. P did work to the value of £333 and
then abandoned the contract, because he had no money. D finished the
buildings himself with materials left by P. P sued to recover the value of the work
he had done on the buildings. The Court of Appeal held that P could not recover.
In order to claim an agreement to pay for the partial performance, P would have
to show that the circumstances were such that D was given the option to take or
reject the benefit of the work done. In this case, it would be unreasonable to
expect D to keep an incomplete building on his land. D had no choice but to
accept P’s partial performance.

Substantial performance

If a promisor performs a substantial part of the contract, he may be able to

recover on a quantum meruit basis for incomplete performance. In Hoenig v
Isaacs, P decorated D’s flat but because of faulty workmanship, D had to pay
£50 to another firm to finish the job. The Court decided that P was entitled to the
contract price (£150) minus the £50 paid to the other firm. This is another
circumstance in which the requirement that performance be exact is not strictly
applied.

II. Time for performance

Equity considers that time is not ‘of the essence of a contract’. This means that
performance by a particular time is not considered a condition of the contract. So
the performance of a contract with delays does not necessarily bring a contract to
an end. There are exceptions to this general rule where:

(a) It is stipulated in the contract.

(b) Reasonable notice had been given during the currency of the contract that
performance must take place by a certain time; In Rickards v
Oppenheim, a car body had been ordered from P. It was late. D gave a
final notice to P that unless it was delivered within 3 months that the order
would be cancelled. The car body did not arrive during that 3 month
period. The Court held that D could cancel the order since time had been
made of the essence.

(c) The nature of the contract makes it a requirement that stipulations as to

time should be observed. For example, contracts for sale of fruits and
vegetables. If timelines are not adhered to, the items which are the
subject of the contract will perish.

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 III. Tender of Performance and payment

If one party tenders performance which is rejected, that party may sue for breach
of contract. If payment is tendered and rejected the obligation to tender payment
is discharged, but the obligation to pay remains. So the party who tendered
payment need not pay until requested to do so by the rejecting party.

HOMEWORK

Prepare for test on Wednesday, 27th January, 2010 on everything covered in

Module 2 to date.

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