Law of Obligations Content and Discharge of Contracts

Law of Obligations
Content and Discharge of contracts
Lecture 4
Learning Outcomes
Content of a Contracts
 Explain the difference between a term of a contract and a representation.
 Appreciate the necessity for certainty of contractual terms and explain the
difference between express and implied terms.
 Distinguish between conditions, warranties, and innominate terms and
explain the different legal consequences that result from breach of them.
 Describe the nature of exemption clauses and explain the methods used by
the courts to restrict the use of such clauses.
Pre Contractual Statements
It is essential to establish what the parties said or wrote
Not all these statements will be deemed to be terms of the contract
A statement might be:

Factors Taken into Account in Distinguishing a
Contractual Term from a Mere Representation
The importance of the statement to the parties
 major importance to either party and that party would not have entered the agreement
without it, it will be a term of the contract
 Bannerman v White (1861) - The defendant purchaser wished to buy hops for brewing
purposes and during negotiations he asked the claimant seller if the hops had been treated
with sulphur. The seller assured him that the hops had not been treated with sulphur, and
the defendant agreed to buy them. Later the defendant discovered the hops had been
treated with sulphur, and he refused to accept delivery of them. The claimant seller sued
for breach of contract, claiming that the statement relating to sulphur was a preliminary
statement and not a term of the contract. Decision: The claimant’s statement regarding the
sulphur was a fundamental term of the contract and, since it was not true, the defendant
could terminate the contract.
The interval of time between the statement and contract
 lengthy time gap between the statement and the contract, it is usually a
representation.
 Routledge v Mckay (1954) - On 23 October, when discussing the sale of
his motorbike, the defendant seller told the claimant purchaser that the
bike was a 1942 model. The seller had taken this information from the
registration document. On the 30 October, the parties signed a written
contract which made no reference to the date of the motorbike. The
motorbike was in fact a 1930 model. Decision: The statement about the
motorbike being a 1942 model was a pre-contractual statement, and not
a term of the contract.
Oral statements and written contracts
 Where the statement is oral and the contract is written, the oral
statement is usually a representation
 If the oral statement is put in writing after it was made, then it is more
likely to be a contractual term
The knowledge and skill of the party making the statement
 who has specialist skills or knowledge, to a party who is relying on those
specialist skills, is more likely to be treated as a term of the contract.
 without any specialist knowledge, this statement is less likely to be
construed as a term of the contract, particularly if it is made to a person
with expertise.
 Dick Bentley Productions Ltd v Harold Smith (1965) - The claimant, a
businessman, asked the defendants, car dealers, to find him a Bentley
car in good condition. The defendants found a car and stated that it had
only done 20,000 miles since a new engine and gear box had been fitted.
In fact, the car had done 100,000 miles since the replacement parts were
fitted. Decision: The statement had influenced the claimant when
making a decision to purchase the car. It was made by a specialist in the
car trade and was a term of the contract.
Express Terms and Implied Terms
 Express term - term expressly agreed by the parties to a contract to be
a term of that contract. In examining a contract, the courts will look first
at the terms expressly agreed by the parties.
 Where an agreement appears vague or incomplete, the courts will seek
to uphold it by looking at the intention of the parties.
 If the parties use standard printed conditions, some of which are
inappropriate, such phrases may be disregarded.
 Nicolene v Simmonds 1953 - The claimant offered to buy steel bars from
the defendant. A contract was made by correspondence, in which the
defendant provided that 'the usual conditions of acceptance apply'. The
defendant failed to deliver the goods and argued that there had been no
explicit agreement. Decision: The words should be disregarded. The
contract was complete without these words; there were no usual
conditions of acceptance
 Implied terms - Terms may be implied by the courts, by statute or by
custom
 Protection given by the Sale of Goods Act 1979 to a consumer who buys
goods from a trader cannot be taken away from him
 The parties may enter into a contract subject to customs of their trade.
Any express term overrides a term which might be implied by custom
 Hutton v Warren 1836 - The defendant landlord gave the claimant, a
tenant farmer, notice to quit the farm. He insisted that the tenant should
continue to farm the land during the period of notice. The tenant asked
for 'a fair allowance' for seeds and labour from which he received no
benefit because he was to leave the farm. Decision: By custom he was
bound to farm the land until the end of the tenancy; but he was also
entitled to a fair allowance for seeds and labour incurred.
Terms may be implied if the court concludes that the parties
intended those terms to apply to the contract
The Moorcock 1889 - The owners of a wharf agreed that a ship
should be moored alongside to unload its cargo. It was well known
that at low water the ship would ground on the mud at the bottom.
At ebb tide the ship settled on a ridge concealed beneath the mud
and suffered damage. Decision: It was an implied term, though not
expressed, that the ground alongside the wharf was safe at low tide
since both parties knew that the ship must rest on it.
Conditions, Warranties and Innominate
Terms
 Terms may be implied if the court concludes that the parties intended
those terms to apply to the contract
 A condition is a vital term, going to the root of the contract, breach of
which entitles the injured party to decide to treat the contract as
discharged and to claim damages.
 Poussard v Spiers 1876 - Mme Poussard agreed to sing in an opera
throughout a series of performances. Owing to illness she was unable to
appear on the opening night and the next few days. The producer
engaged a substitute who insisted that she should be engaged for the
whole run. When Mme Poussard recovered, the producer declined to
accept her services for the remaining performances. Decision: Failure to
sing on the opening night was a breach of condition which entitled the
producer to treat the contract for the remaining performances as
discharged.
Terms
 A warranty is a term subsidiary to the main purpose of the contract, breach of
which only entitles the injured party to claim damages.
 Innominate Terms - It may not be possible to determine whether a term is a
condition or a warranty. Such terms are classified by the courts as innominate
terms.
 Hong Kong Fir Shipping Co Ltd v Kawasaki Kisa Kaisha Ltd 1962 - The defendants chartered a
ship from the claimants for a period of 24 months. A term in the contract stated that the
claimants would provide a ship which was 'in every way fitted for ordinary cargo service'.
Because of the engine's age and the crew's lack of competence the ship's first voyage, from
Liverpool to Osaka, was delayed for five months and further repairs were required at the end
of it. The defendants purported to terminate the contract, so the claimants sued for breach;
the defendants claimed that the claimants were in breach of a contractual condition. Decision:
The term was innominate and could not automatically be construed as either a condition or a
warranty. The obligation of 'seaworthiness' embodied in many charterparty agreements was
too complex to be fitted into one of the two categories. The ship was still available for 17 out of
24 months. The consequences of the breach were not so serious that the defendants could be
justified in terminating the contract as a result.
Terms
Exclusion Clauses – Common Law Rules
A clause in a contract which purports to exclude liability altogether
or to restrict it by limiting damages or by imposing other onerous
conditions. They are sometimes referred to as exemption clauses
Validity of exclusion clauses
must satisfy the following criteria
The exemption clause must be incorporated into the contract and not
added after the contract has been made.
The exemption clause must be clear and unambiguous. Exemption
clauses are interpreted strictly and any vagueness will be construed
against the party seeking to enforce the clause.
The exemption clause must comply with the statutory rules set out in
the Unfair Contract Terms Act 1977 and the Unfair Terms in
Consumer Contracts Regulations1999.
Signed Documents
Parties usually have constructive notice of the contents of any
contractual document which they sign, even if the document has
not been read and one of the parties is unaware of the existence of
an exemption clause.
L’Estrange v Graucob (1934) - The claimant purchased a cigarette
vending machine for her café. She signed a contract without
reading it. The contract excluded various rights. Decision: The
claimant was bound by the exclusion clause regardless of the fact
that she had not read the document as she had signed it.
Unsigned Documents and Notices
 A party to a contract may be bound by an exemption clause even if they have
not signed a contractual document, provided reasonable steps are taken to
bring the exemption clause to their attention
 Chapelton v Barry Urban District Council (1940) - The claimant took two
deckchairs from a pile of chairs beside which there was a notice stating that
payment should be made to the beach attendant. The claimant paid the beach
attendant and was handed two tickets which he put into his pocket unread.
Each ticket contained a clause exempting the defendant Council from liability
for any accident or damage arising from the hire of the chair. The canvas on
one of the chairs was defective and the claimant was injured when the
deckchair collapsed. The claimant sought compensation from the defendant
Council, but the Council tried to rely on the exclusion clause. Decision: The
court stated that a reasonable man would assume the tickets given to the
claimant were mere receipts and not contractual documents which might
contain conditions. Therefore the defendant Council could not rely on the
exclusion clause to exclude their liability.
 If one party wishes to rely on a particularly onerous or unusual term,
which would not generally be known to the other party, a greater degree
of notice is needed in order to satisfy the reasonable notice test. Often,
in these circumstances, the onerous term has to be specially drawn to
the attention of the other party otherwise it will not become
incorporated into the contract.
 Interphoto Picture Library v Stiletto Visual Programmes (1988) - A
contract for the hire of photographic transparencies included a clause
stating that, if the transparencies were not returned on time, there was a
penalty payable of £5 for each transparency per day. The claimants were
14 days late returning 47 transparencies. Decision: Reasonable steps
had not been taken to bring the onerous nature of this term to the other
side’s attention and, consequently, the term was not part of the contract.
The court awarded damages of £3.50 per week on a quantum meruit
basis (as much as is merited in the circumstances) and would not apply
the excessive charge of £5 per day per transparency.
 If an exemption clause is written on a notice or contained in a document, that
notice or document must be displayed or given to the other party before or at
the time of entering into the contract
 Olley v Marlborough Court Ltd (1949) - The claimant guests, Mr and Mrs Olley,
arranged to stay at the defendant’s hotel, and on arrival paid in advance at the
reception desk for their accommodation. The claimants went upstairs to their
room where there was a notice stating, ‘The proprietors will not hold
themselves responsible for articles lost or stolen unless handed to the
manageress for safe custody’. After unpacking, the claimants went out, locking
the door and leaving the key at reception. Whilst they were out, Mrs Olley’s
furs were stolen from the room, and she sued the hotel owners who claimed
the protection of the exclusion clause. Decision: The defendants could not rely
on the exclusion clause displayed in the hotel bedroom because the contract
was made at the reception desk before the claimants had notice of the clause.
Contractual terms notified after a contract is made are not effective; therefore,
the defendants were liable for the loss.
Interpretation of Exclusion Clauses
 the courts interpret any ambiguity against the party who relies on the
exclusion. This is known as the ‘contra proferentem rule’. Liability can
only be excluded or restricted by clear words.
 If a person wishes successfully to exclude or limit liability for loss
caused by negligence the courts require that the word 'negligence', or an
accepted synonym for it, should be included in the clause
 Alderslade v Hendon Laundry 1945 - The conditions of contracts made
by a laundry with its customers excluded liability for loss of, or damage
to, customers' clothing in the possession of the laundry. By its
negligence the laundry lost the claimant's handkerchief. Decision: The
exclusion clause would have no meaning unless it covered loss or
damage due to negligence. It did, therefore, cover loss by negligence.
Main Purpose Rule
When construing an exclusion clause the court will also consider
the main purpose rule. By this, the court presumes that the clause
was not intended to prevent the main purpose of the contract.
Fundamental Breach
 An exclusion clause may purport to exclude liability for a fundamental
breach of contract
 Photo Productions v Securicor Transport 1980 - The defendants agreed
to guard the claimants' factory under a contract by which the defendants
were excluded from liability for damage caused by any of their
employees. One of the guards deliberately started a small fire which
destroyed the factory and contents. It was contended that Securicor had
entirely failed to perform their contract and so they could not rely on
any exclusion clause in the contract. Decision: There is no principle that
total failure to perform a contract deprives the party at fault of any
exclusion from liability provided by the contract. In this case the
exclusion clause was drawn widely enough to cover the damage which
had happened. As the fire occurred before the UCTA was in force, the Act
could not apply here. But if it had done it would have been necessary to
consider whether the exclusion clause was reasonable.
Learning Outcomes
Discharge of a Contracts
 Explain how a contract can be discharged through agreement between the
parties.
 Outline the elements necessary for a contract to be discharged by
performance.
 Describe the meaning and effect of frustration of a contract.
 Explain the meaning of breach of contract and understand its consequences.
 Demonstrate knowledge of the remedies for breach of contract.
 When a contract comes to an end

Discharge by Agreement
Brings a contract to an end before all the obligations under it
have been completed
Second contract – binding
Bilateral or Unilateral
Bilateral agreement to discharge
Where neither party has completed all their obligations under the
contract
There is consideration
 Ben contracts with Gita to a fit a bidet and heated towel rail in Gita’s bathroom for £700.
A week later Gita decides there is no room for the towel rail, and Ben, who was
concerned about the electrical work, is happy to agree not to carry out the work. Gita
releases Ben from fitting the towel rail (consideration by Gita) and in return Ben
releases Gita from her obligation to pay £300 (consideration by Ben)
Discharge by Agreement cont..
Unilateral agreement to discharge
where one party has performed all their obligations under the
contract, and the other party has not, but wishes to be released
from their obligations to do so
An agreement to release the party who has not performed all
their obligations will only be binding if that party provides some
consideration for the release, or the agreement is made by deed.
Agreement - an accord
supply of consideration –satisfaction
Arrangement – accord and satisfaction
Discharge by Performance
Each party completes their promise
contract ends because all the obligations under the contract
have been performed
Performance must exactly match what was agreed by the
parties
Discharge by Performance cont..
There are four exceptions whereby a contract is partly
enforceable even though performance has not been fully
completed.
Substantial Performance
Where a contractual obligation is regarded as an entire
requirement, a party may be entitled to payment for the work
they have carried out if they have almost or very nearly
completed the whole contractual obligation.
Can recover costs for the work he has done, less an amount to
cover the obligations that he has not completed
 Hoenig v Isaacs (1952): The defendant contracted with the claimant to decorate and
furnish his flat for £750. The defendant paid £400 while the work was being carried out,
but he refused to pay the remaining £350 because of defects in a bookcase and
wardrobe (which it was established would cost £55 to correct). Decision: The contract
was substantially performed and only in some minor details did it differ from the terms
agreed. The claimant was entitled to the contract price less the cost of correcting the
defects.
Divisible Contracts
Divisible into parts, and payment becomes due at various
stages of performance
Eg: Contract of employment
Entire or divisible contract depends on the intentions of the
parties and the express and implied terms of the contract
Ritchie v Atkinson (1808) - A ship owner contracted with owners of a
cargo of hemp to transport the hemp at £5 a ton. The ship owner only
transported part of the load. The owners claimed they were not bound
to pay any transportation costs as the ship owner had not transported
all the hemp. Decision: The obligation to carry the hemp was divisible,
and the ship owner could claim for each ton of cargo that had been
carried.
Acceptance of Partial Performance
Where a contract is not divisible and is an entire contract, it
may be possible to show that the other party has voluntarily
accepted partial performance
must pay an appropriate price for the work completed
Abandoned the original contract and making a second contract
on different terms
Must have a genuine choice whether to accept or reject the
goods or work done
Prevention of Complete Performance
A party is entitled to recover the costs of partially completing a
contract if he is prevented from completing all the work he has
agreed to undertake due to the fault of the other party
Planche v Colburn (1831) - An author agreed to write a book, as
part of a series of books on a particular theme, for payment of
£100 on completion of the book. After the author had started
researching and writing his book, the publisher decided to stop
publishing the series of books, and informed the author that his
book was no longer required. Decision: The author was entitled
to part-payment of £50 on a quantum meruit basis, for
preparation of a book which he had been prevented from
finishing.
Discharge by Frustration
contract formed but before all the obligations under the
contract have been completed, an event may occur which
causes the contract to be frustrated.
No fault of either of the parties
Must make performance of the contract impossible, illegal, or
radically different from what had been agreed
Parties are discharged from carrying out any further
obligations
Discharge by Frustration cont..
Situations leading to frustration of a contract
The destruction of the subject matter of the contract
Personal incapacity of one of the parties
Non-occurrence of event central to the purpose of a contract
Subsequent illegality
Government intervention
Situations leading to frustration of a contract cont..
The destruction of the subject matter of the contract
Object of the contract becomes impossible
Taylor v Caldwell (1863) - Caldwell agreed to rent a music hall
from Taylor. He rented the hall for four days for a series of
concerts. After the contract was agreed, but before the concerts
had taken place, the music hall was destroyed by fire. Decision:
Performance of the contract was impossible; therefore, the
contract was frustrated, and both parties were released from
their obligations under it.
Personal incapacity of one of the parties
If one of the parties to the contract dies
Illness will not usually frustrate a contract
Permanently incapable of performing the contract through illness
– frustrated
 Condor v Barron Knights (1966) - Condor contracted to be drummer in the
Barron Knights. The contract stated that he must be available to perform
seven nights a week, if required. Condor became ill and was advised by the
doctor to rest and work not more than four nights a week. Decision: The
contract was frustrated by Condor’s health preventing him from performing
his duties
Non-occurrence of event central to the purpose of a contract
If the parties have based the whole purpose of the contract on
some forthcoming event which is cancelled
Not the fault of neither of the parties
All commercial purposes of the contract must be destroyed
 Krell v Henry (1903) - The coronation of Edward VII had been planned for June 1902 and
processions were due to take place on 26 and 27 June. On 20 June the defendant, Henry,
hired a flat for 26 and 27 June in order to watch the processions. In the contract there was
no specific mention of the purpose of the hire but it was clear to both parties that it was to
watch the processions. Edward VII was ill and the coronation was cancelled. The defendant
refused to pay for the flat. Decision: Watching the procession was the sole purpose of hiring
the flat; therefore, the foundation of the contract had been destroyed. The contract was
frustrated, and the defendant was not liable to pay for the flat.
Subsequent illegality
If a contract is legal when it is made but afterwards there are
changes in the law, or circumstances alter making the fulfilling of
the obligations under the contract illegal
Gamerco SA v ICM/Fair Warning (Agency) Ltd (1995) - The
claimant agreed to promote a rock concert for Guns N' Roses in a
stadium in Madrid. The Spanish authorities declared the stadium
unsafe and banned its use until further tests. There was no other
venue available. Decision: The contract was frustrated.
Government intervention
During national emergencies and times of war the government
may, acting in the public interest, requisition goods or property
Re Shipton, Anderson & Co and Harrison Bros Arbitration (1915) -
A contract was made for the sale of wheat stored in a Liverpool
warehouse; before the wheat was delivered to the buyer, the
government requisitioned it. Decision: Delivery of the wheat was
impossible as the wheat had been legally requisitioned;
therefore, the contract was frustrated.
Discharge by Breach
if one of the parties breaks one or more of the terms of the
contract, or indicates in advance that he does not intend to
perform the contract
If the term is a condition of the contract or an innominate term
– discharged
If it is a warrant – Not discharged
Breach of conditions
go to the root of the contract
Discharge by Breach cont..
Breach of warranties
minor terms of a contract which are incidental to the main purpose
innocent party can claim damages for loss suffered but must
continue with the contract
Breach of innominate terms
Innominate terms - where a term is worded broadly to cover a
number of potential breaches it may not be possible to decide
whether a breach of the term would have important or trivial
consequences.
Injured party will be entitled to damages
Actual breach of contract
when performance of a contract is due and one party fails to
carry out his obligations, or carries out his obligations so
ineptly that the main purpose of the contract is destroyed
Anticipatory breach
one party, prior to the actual date of performance, expressly
informs the other party that they do not intend to perform
some or all of their contractual obligations, or from their
conduct it is clear that they do not intend to do this
The innocent party is entitled to recover damages for the loss
of any benefit that they would have received if the contract had
been performed.
Anticipatory breach cont..
When the innocent party is aware there will be a breach of contract
by the other party, they do not have to sue straight away.
The innocent party has a choice whether to sue as soon as they
know the other party intends to breach the contract, or they can
wait until the date of performance is passed and sue after the
contract has actually been breached.
where a breach is anticipated but has not yet happened, a party has
no legal obligation to accept the breach. Until a breach of contract is
accepted, there is no duty to mitigate loss.
Where there is an anticipatory breach, the innocent party may
decide to treat the contract as continuing and perform his part,
waiting until the actual time for performance before taking action,
even if his loss is increased when he finally sues for damages
White and Carter Ltd v McGregor (1961) - The claimants were
advertising agents who supplied litter bins on which they displayed
adverts. The defendant contracted with the claimants to advertise
his garage for three years, but later the same day he cancelled the
agreement. The claimants refused to accept the cancellation,
carried out their part of the contract, and claimed the agreed
payment from the defendant. Decision: Repudiation of a contract
does not bring the contract to an end, but gives the innocent party
the choice to accept or reject the repudiation. The claimants did not
have to accept the defendant’s anticipatory breach but were
entitled to complete the contract. There was no duty to mitigate the
loss until the breach was accepted.
The principle in White and Carter Ltd v McGregor is restricted to
cases where no cooperation for performance is required from
the other party to the contract, and where the innocent party
has a genuine reason for continuing with the contract, other
than just to claim additional damages.
Remedies for breach of a contract
Damages
Action for agreed contract price
Quantum meruit
Specific performance
Injunction
Repudiation

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Law of Obligations

Content and Discharge of contracts

Not all these statements will be deemed to be terms of the contract

A statement might be:

 When a contract comes to an end

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