ABE Principles of Business Law 2008-1

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Charles Rickards Ltd v. Oppenheim (1950)

In early 1947, Oppenheim ordered a Rolls Royce chassis. In July, Rickards agreed that the body should be built for it "within six or at most seven months". Seven months later, it was not completed; so, Oppenheim agreed to the company taking a further three months. At the end of this time, it was still not ready. Oppenheim served notice on Rickards that, if the car was not ready in four weeks, he would cancel the order. It was not – so he cancelled. Three months later, the finished Rolls Royce was tendered but Oppenheim refused to accept it.

HELD: He was entitled to do so. Time was not, originally, of the essence, but because of Rickards' breach, the notice requiring completion in four weeks served to make time of the essence.

If a contract does not specify any time for performance, or if vague words are used, such as "as soon as possible", or "with all dispatch", then an obligation is implied by law to perform within a reasonable time.

Partial Performance of an Entire Contract

The complete performance of an entire contract is, normally, a condition precedent to any liability on the other party – e.g. to make payment. The courts cannot apportion the consideration – so, unless the contract is completed, nothing is due on account of it. The classic example is Cutter v. Powell (1795). A seaman was engaged for a lump sum on completion of the voyage. He died part way through the voyage, and it was held that his executors could not claim any wages for the time prior to his death.

The common law rule on entire contracts was largely developed by building or "work and materials" contracts. So, unless the contract provided for stage payments, if a builder failed to complete a house, he/she could recover nothing, even though the owner would have derived substantial benefit from the work that had been done, and materials provided (modern building contracts always provide for stage payments!).

Likewise, a ship-owner cannot recover freight if the goods are not carried to the agreed destination (bills of lading, therefore, always provide for freight to be payable, "cargo lost or not lost"!).

From these two examples, you will see that, by express words, a contract can allow for partial payment in the event of incomplete performance. In addition, to alleviate what could be an absurdity, the doctrine of "substantial performance" has evolved. This says that, if a person has completed the contract in all but an insignificant or unimportant part, he/she is entitled to payment for the whole, less any amount for the uncompleted work. What is "substantial performance" is a question of fact, depending on the circumstances and the details of the contract.

"Substantial performance" can be excluded by express words in the contract.

If a contract is, however, only partially completed, and the circumstances are such that the court can reasonably imply it, then it may imply a fresh contract to accept what has been performed, and pay on a "quantum meruit" – i.e. for what has been done. This is likely to occur by implication where the innocent party has actually accepted some benefit under the contract. For example, in contracts for sale of goods, a buyer is not compelled to accept a different quantity from that ordered. However, if he/she does accept them, they must be paid for at the contract rate for what has been taken.

A similar principle applies where an employee performs only part of his/her contract, e.g. as part of some industrial action. In Miles v. Wakefield Metropolitan District Council (1987) a Superintendent Registrar of Births, Marriages and Deaths refused to perform marriage ceremonies on Saturday mornings. His employers deducted from his salary the time spent on such refusal. He challenged the validity of the deductions.

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HELD: The employers had behaved properly. They were not bound to choose between dismissing him and paying for incomplete work.

This principle was taken further in Wiluszynski v. Tower Hamlets London Borough Council (1989). Here the employer issued all employees working to rule (withholding specific duties) with a notice rejecting their part-performance of the contract, and informing them that they would not be required to work at all unless they were prepared to do all that their contract required. The Council also stated that if the employees wished to enter the offices and work, such work would therefore be deemed to be voluntary and unpaid. Whereas in Miles the employer had merely deducted a proportion of the salary representing the work not done, here the Council sought to avoid payment completely.

HELD: As the employees were offering only part-performance the employer was within its rights to reject the part-performance and refuse to pay at all.

On the other hand, if a contract is not "entire" but it is divisible, the court can treat each part as entire. Those divisible parts which are completed must be paid for.

Payment

A contract may provide for payment in a certain manner or at a certain time – and, if complied with, this serves to discharge the obligation to pay.

If there is no specific provision, the strict rule is that payment must be made in legal tender. If the creditor accepts a cheque, bill of exchange, or other negotiable instrument, he/she is, in reality, agreeing to a variation of the contract. However, if such a negotiable instrument is dishonoured, the creditor has two remedies – he/she can sue for the value of the dishonoured cheque or other instrument, or revert to the original contract, and sue for payment under it. In practice, it is, usually, simpler to sue in respect of the instrument, as then no proof is required that the contract has been performed, and the money due.

Should payment be made by a third party who is not jointly liable under the contract, then the debt is not discharged unless the third party pays as agent for the debtor, and with his/her authority.

However, if the creditor requests the debtor to make payment to a third party, this – when made – discharges the debt.

The time of payment is a question of the construction of the contract. It may be expressly stated, or to be necessarily inferred from the terms. However, if nothing is stated or to be inferred, the debtor must pay when the work is completed and he/she has had a reasonable opportunity to inspect it. Money which is stated to be "payable on demand" must be ready and handed over when demanded.

The place of payment is, unless otherwise stated in the contract, or to be inferred from it, the place of business or residence of the creditor. It is the debtor's job to seek out the creditor and pay him/her.

Proof of payment may be given in any way. A "receipt" is only prima facie evidence of payment.

Tender

"Tender" is the act of attempted performance. It applies to both parties. One party may tender work in performance of his/her promise; the other may tender payment.

If the one party tenders work, and the other refuses to accept it, the tenderor may elect to treat the contract as repudiated, and sue for damages. On the other hand, if a debtor tenders payment, and the creditor refuses to accept it, the debt is not discharged. The debtor must continue and remain ready to pay the debt. Should the creditor sue, the debtor can plead that he/she duly tendered it – but must still pay the money into court.

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As we said before, unless the contract provides otherwise, strictly speaking, tender of payment must be in legal tender. The creditor is not bound to accept a cheque or other instrument of payment. That is the old rule but nowadays, in commercial transactions, any recognised method of transferring money which gives the creditor immediate use of the funds will suffice.

Note: Specific rules as to payment and performance apply to contracts for the sale and supply of goods (see later).

B. DISCHARGE BY AGREEMENT

You would think that, as a contract comes into existence only by agreement, its discharge, or ending, could equally easily be effected by agreement. Up to a point, this is true but, in the same way as there are various technical rules governing the valid formation of the contract, so there are rules, some rather artificial, governing its discharge.

There are four ways in which a contract can be discharged by agreement – by "release"; by "accord and satisfaction"; by "rescission"; and by some provision contained in the contract itself. Let us look at these in some detail.

Release

If one party releases another from his/her obligations, there is, normally, no consideration for the act. This applies where the party releasing the other has fully performed all his/her obligations, while the other has not. If both of them still have obligations to perform, the consideration for each foregoing his/her rights is the foregoing by the other. However, if there is no consideration a unilateral release can be effective only if it is under seal. You will remember that a contract under seal is valid even if no consideration is present.

An agreement not to sue in perpetuity has always amounted to a "release". However, such a covenant for a limited time only was at common law not a valid release. Equity, however, would interfere to grant an injunction to prevent a party suing in breach of his/her agreement not to. Hence, as equity prevails, an agreement not to sue is, in effect, a valid release, whether it be in perpetuity or for a limited time – provided, of course, the agreement is either for valuable consideration or under seal.

Accord and Satisfaction

Provided that consideration is present, a contract can be discharged by agreement, even though only one party has fulfilled all his/her obligations. This is called "accord and satisfaction". The "accord" is the agreement, the "satisfaction" is the consideration. Provided that the satisfaction is valuable consideration (in exactly the same way as the consideration for the valid formation of a contract must be valuable), all is well. In this context, it can, of course, be some other performance than that of the original obligation.

You will remember that, earlier, we discussed the rule in Pinnel's Case. This states that the payment of a smaller sum in satisfaction of a larger is not a good discharge of a debt. However, if the payment of the smaller sum is made in a different way, or at a different time from that prescribed for the larger sum, this difference constitutes adequate consideration to support the agreement for discharge of the whole debt. This is an example of discharge by accord and satisfaction.

There are two main exceptions to the rule requiring consideration for the discharge of a contract by agreement where one party has not fully performed. The first is statutory. Under the Bills of Exchange Act 1882, no "satisfaction" is required for the discharge of a bill of exchange, provided that either the discharge is in writing or the bill itself is delivered up to the person who accepted it

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The second exception, which is, perhaps, only a partial one, arises through the principle of what is known as promissory estoppel, which we mentioned earlier. This principle states that, if one party intimates to the other that she will not insist on her strict contractual rights and the second party, in reliance on that statement, incurs expense or obligations, then the first party will not be permitted by equity to go back on her promise. The principle was largely developed by Lord Denning in Central London Property Trust Ltd.

Central London Property Trust Ltd v. High Trees House Ltd (1947)

P leased a block of flats to D, in 1937, for £2,500 a year. In 1940, on account of the war, D was unable to let the flats to tenants, so P agreed to reduce the annual rent to £1,250. At the end of the war, the situation returned to normal, and all the flats could be let. P claimed that the full rent should be paid only from the end of the war in June 1945.

HELD: P succeeded but Lord Denning made it quite clear that, had they sued for a refund of the amounts underpaid from 1940, they would have been estopped by the promise from insisting on their strict legal claim. Because the lessees had acted to their detriment in reliance on a promise to forgo rights, the original rights could not be enforced.

So, promissory estoppel serves to postpone and not totally to obliterate the strict rights. Once the circumstances giving rise to the promise have disappeared, or reasonable notice has been given that in future strict performance will be required, the legal rights revive.

Rescission

While a contract is still executory – that is, it has not been fully performed by both sides – it can be discharged by mutual agreement, the consideration for the agreement being the mutual giving-up of rights under the contract. In the court context, the remedy is rescission: it recognises and enforces the contract termination.

The effect of joint repudiation is that the contract is discharged, and rights under it cannot afterwards be revived, although money paid in respect of an agreement that has proved abortive can be recovered by an action for "money had and received" (quasi-contract). By the same token, a contract can always be varied by agreement. Here, the terms of the contract are altered – but the original contract still subsists. Whether such an action is, in reality, a variation, or whether it amounts to rescission of the original, followed by a new contract incorporating the altered terms, is a question of construction and scope.

Morris v. Baron & Co. (1918)

There was a contract for the sale of cloth. A dispute arose, and legal action started. The parties then agreed to stop their legal action, and that an extension of time for payment should be given to the buyer, and that, instead of having to take delivery of the balance of the cloth, he should have an option to take it only if he wished.

HELD: This amounted to a discharge of the original contract, followed by a substituted contract.

However, in Berry v. Berry (1929), a husband and wife separated, and the husband agreed to pay a certain annual maintenance. His income proved insufficient, so both parties agreed that the sum should be reduced.

HELD: This was a valid and enforceable variation.

A waiver is another variant on the same theme, and it is akin to a "release". This applies when one party agrees not to insist on the exact method of performance by the other fixed by the contract. He/she agrees to waive his/her rights to strict contractual performance. Unless the doctrine of promissory estoppel can be brought into play, there must be some valuable consideration for a waiver, or else it must be under seal.

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Provisions Contained in the Contract Itself

This is fairly obvious. If the contract itself provides for its discharge in certain circumstances, then this is an agreed contractual term. The question of consideration does not apply, as it is part of the consideration for the contract.

C. DISCHARGE BY BREACH

Earlier we defined the difference between "conditions" and "warranties" – a condition being a term of the contract which is fundamental, and breach of which entitles the injured party to rescind the contract. The contract is, therefore, discharged by breach. What this means is that the injured party is discharged from the necessity for further performance by reason of the breach of contract by the other.

The innocent party is not bound to rescind in the event of breach of a condition by the other

– he has the option. He can rescind and claim damages, or he can affirm the contract, and carry on with his own performance. If he does affirm it, he is still able to claim damages for any loss resulting from the breach. In other words, he is electing to treat the condition breached as if it were a warranty.

If you look at the question from the other side, the person guilty of such a breach giving rise to a right of rescission brings this about in one of three ways – by renouncing her obligations to perform; by creating a situation whereby it is impossible for her to perform; or by a complete or partial failure to perform her obligations.

Renunciation

If one of the parties, by his words or his actions, makes it plain that he has no intention of performing or continuing to perform his side of the bargain, he is said to renounce the contract.

In order to justify the innocent party then treating the contract as discharged, the renunciation must be substantially complete. A mere refusal to carry out a part is not sufficient, unless that part is an essential element of the contract. The test is: "Would a reasonable person conclude from his/her words or deeds that he/she no longer intended to be bound by the terms of the contract?"

Renunciation can occur either before the time for performance has arrived or during its course. In the latter event, the problem is straightforward.

Whether renunciation has occurred such as to entitle the innocent party to rescind is a matter of fact for the court.

In the former event, however, the innocent party has a choice.

(a)He can wait for the time of performance to arrive, then sue for damages and, if applicable, refuse himself to perform by reason of the renunciation.

(b)He can forthwith treat the renunciation as absolving him from the necessity to perform, and sue for damages. This is called "anticipatory breach". If one party, by words or conduct, leads the other reasonably to believe that he does not intend to be bound by his agreement, the law does not require that other party to await the inevitable. To protect himself, or to mitigate his loss, he is quite entitled to anticipate the inevitable event, and act accordingly.

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Hochster v. De la Tour (1853)

A travelling courier was appointed for a journey. Before the time for the start, the employer wrote to say he no longer required the services of the courier. The courier immediately sued for damages.

HELD: He was entitled to do so. He need not await the inevitable.

A more recent case which illustrates not only the doctrine of anticipatory breach but also what constitutes grounds for repudiation of a contract by reason of the renunciation of it by the other party is Federal Commerce v. Molena Alpha (1979).

By identical charter-party agreements, the owners of three ships chartered them to charterers. Part of the agreements was that the ships' masters were entitled to issue "freight paid" bills of lading (i.e. warranting that the freight on cargo was duly prepaid), and that the charterers were entitled to make deductions from the hire charge in specified events. One of these was in respect of delay as a result of slow steaming.

The ships were delayed by engine repairs and slow steaming, so the charterers informed the owners that they were deducting a certain sum from the hire due. The owners refused to authorise the deduction, and demanded full payment. The charterers nevertheless deducted it. The owners retaliated by instructing the masters of their vessels not to issue any "freight prepaid" bills of lading. They well knew that this action would place the charterers in a very difficult situation.

When this happened, the charterers claimed that the owners' actions were a renunciation of the contract which they accepted as such, and which constituted a discharge of the contract.

HELD: By the House of Lords, in the first place, that the instruction to the ships' masters was an anticipatory breach of contract. Second, that, although the clause in question that had been breached was not one that automatically amounted to a repudiation, the fact was that it threatened to deprive the charterers of substantially the whole benefit of the contract. It therefore went to the root, and did entitle the charterers to terminate the contracts.

Lord Wilberforce had the following to add:

"A threat to commit a breach, having radical consequences, is nonetheless serious because it is disproportionate to the intended effect. Further, if a party's conduct is such as to amount to a threatened repudiatory breach, his subjective desire to maintain the contract cannot prevent the other party from drawing the consequences of his actions."

Impossibility Created by One Party

If one party, by her own actions (or lack of them) creates a situation whereby it is impossible for her to perform, she is not allowed to rely on the impossibility as being an excuse for not performing. The other party is entitled to treat the contract as discharged. If the impossibility is created before the time of performance, it will often, but not necessarily, give rise to anticipatory breach.

Universal Cargo Carriers Corporation v. Citati (1957)

The charterer of a ship contracted to nominate a berth, provide a cargo, and load it – all before a given date. Three days before this date, he had done none of these things.

HELD: The shipowner could treat the contract as discharged, as it would be impossible to perform, owing to the charterer's own neglect.

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Failure of Performance

In the event that one party fails to perform, whether wholly or partially, this may entitle the other to treat the contract as discharged. Whether or not he/she can depends on the extent and importance of the failure. Once again, the question is: "Did the failure to perform amount to a breach of a condition or a warranty?"

This is the classic view but, nowadays, courts often try to escape from the rigid definition of "condition" or "warranty", and they seek to equate the term to the commercial reality or importance of the breach with regard to the commercial intentions of the parties at the time they made their bargain.

Hong Kong Fir Shipping Co. Ltd v. Kawasaki Kisen Kaisha Ltd (1962)

A ship on charter had a succession of engine breakdowns. The charterers claimed that it was an obligation of the owners to provide a seaworthy vessel (i.e. a condition). By reason of the breakdowns, she was not seaworthy; therefore, they were entitled to treat the contract as discharged.

HELD: Regard must be had to the consequences of the breach. These were not sufficient to frustrate the commercial purpose of the contract. Hence, the charterers could not refuse further performance, and the contract was not discharged (but they were, of course, entitled to damages).

D. DISCHARGE BY FRUSTRATION

Introduction

So far, we have talked about contracts being discharged by agreement and by breach – in other words, as a result of some act or neglect on the part of one or both parties. The last category in which a contract can be discharged arises by operation of law, and not by any volition of either party. It is called "frustration".

If some event occurs which is not the fault of either party, and which could not reasonably have been foreseen, which so alters the whole character of the bargain as to make it a totally different thing from that intended, the contract may be discharged by frustration. It is essential to appreciate that the frustrating event must be something extraneous to the contract, and that it must be such as to frustrate the commercial purpose of the contract. It is not up to the parties to agree on whether or not an event, when it occurs, has frustrated the contract. It is strictly a question of law to decide if that event did serve to frustrate. They can, of course, carry on with their bargain, on the same or altered terms, but that has the effect of making a fresh contract after the old one has been discharged by operation of law.

This was not always the case, and the concept of frustration is relatively new.

Paradine v. Jane (1646)

A man was ejected from his leased farm by an alien army, and forcibly prevented from making the profits out of which the rent could be paid. His landlord sued for the rent.

HELD: He must still pay the rent.

However, by 1863 the situation had changed, and a less harsh view prevailed.

Taylor v. Caldwell (1863)

The parties agreed that Caldwell should hire a music hall on four specified nights for concerts. After the contract was made, but before the first night, the hall was burnt down.

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HELD: Caldwell was not liable to damages. A term must be implied into the contract that the parties would be excused if performance became impossible, without the fault of the contractor, through the destruction of the subject-matter.

Shortly afterwards, this concept of destruction of the subject-matter was extended to the frustration of the adventure.

Jackson v. Union Marine Insurance Co. (1874)

The contract was for a ship to proceed from Liverpool to Newport (Gwent) to load a cargo for shipment to San Francisco. Just outside Liverpool, the ship ran aground, and it took nearly eight months to refloat and repair her.

HELD: The contract ended with the stranding.

Test of Frustration

Various tests have been put forward for deciding when a contract is frustrated. Probably the most helpful is that given by the House of Lords in Davis Contractors Ltd.

Davis Contractors Ltd v. Fareham UDC (1956)

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. There must be such a change in the significance of the obligation that the thing undertaken would, if performed, be a different thing from that contracted for."

Illustrations of Frustration

Frustration commonly occurs as a result of war – but by no means necessarily.

Typical events are:

Destruction by fire of the subject-matter

Stranding or sinking of ships

Requisition of the subject-matter by the government

Seizure of a ship by a foreign government

Death or some incapacity, such as illness, which is sufficiently severe that personal performance is impossible.

Robinson v. Davison (1871)

A pianist contracted to give a concert on a certain day but was prevented by illness. It was held that personal performance was at the root of the contract and since this became impossible the contract was discharged.

You should note that in cases other than those which require personal performance, death or illness does not excuse performance under the contract. In the event of death, the deceased's personal representative must assume the liabilities under the contract.

Furthermore, some circumstances arising may excuse part of a contract being performed, without frustrating the whole.

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