Introduction: How Contracts End and What Happens When Things Go Wrong
Welcome to one of the most important chapters in AQA A-Level Law Paper 3: Discharge of a Contract and Remedies! In the previous topics, you learned how a contract is formed and what terms are inside it. Now, we look at the finish line: how does a contract actually end (discharge), and what legal solutions (remedies) are available if one party fails to keep their promise?
Don't worry if this topic feels large at first. We will break it down into clear, digestible steps with real-life analogies, memorable case summaries, and exam-focused tips to help you secure top marks.
Part 1: Discharge of a Contract
When a contract is discharged, it means the contractual relationship has come to an end and both parties are released from their primary obligations. Under the AQA specification, a contract can be discharged in three main ways:
1. Discharge by Performance (the ideal way: doing what was agreed).
2. Discharge by Breach (failing to do what was agreed).
3. Discharge by Frustration (an outside, unexpected event makes performance impossible or radically different).
1. Discharge by Performance
The standard way to end a contract is simply to carry out the agreed promises.
The General Rule: Strict Performance
The common law rule is strict: performance must be complete and exact. If a party performs 99% of a contract, under the strict rule, they have not performed it at all and are entitled to nothing.
Key Case: Cutter v Powell (1795)
A sailor was hired for a voyage from Jamaica to Liverpool. The contract stated he would be paid 30 guineas upon arrival, provided he completed his duties. He died six weeks into the eight-week journey. His widow sued for his wages for the time he worked. The court held she could recover nothing because the contract required complete and exact performance of the entire voyage before any payment was due.
Exceptions to the Strict Rule
Because the strict rule can lead to harsh and unfair results, the law created five key exceptions:
A. Substantial Performance
If a party carries out the contract with only minor defects, they are entitled to the contract price minus the cost of fixing the defect.
* Key Case (Allowed): Hoenig v Isaacs (1952) — An interior decorator decorated a flat for £750. There were minor defects in the furniture costing £55 to fix. The court held there was substantial performance; the decorator was entitled to £750 minus £55.
* Key Case (Refused): Bolton v Mahadeva (1972) — A heating system was installed for £560, but it did not heat the house and emitted carbon monoxide. The defects cost £174 to repair. The court held there was no substantial performance because the defect went to the root of the contract.
B. Severable / Divisible Contracts
If a contract can be broken down into separate parts or instalments (e.g. payment per tonne delivered or per week worked), payment can be claimed for the completed parts.
* Key Case: Ritchie v Atkinson (1808) — A shipowner agreed to carry a cargo of hemp and iron for an agreed rate per ton. He carried only part of the cargo. The court held the contract was divisible, so he was entitled to payment for the tonnes actually carried (though he was liable in damages for not carrying the rest).
C. Prevention of Performance by the Other Party
If Party A starts the work but is prevented from completing it due to Party B's fault, Party A can claim damages or seek payment on a quantum meruit basis (meaning "as much as he has earned").
* Key Case: Planché v Colburn (1831) — An author was hired to write a book for a series. After he conducted research and wrote chapters, the publisher cancelled the series. The court allowed the author to recover a quantum meruit fee for the work done.
D. Acceptance of Partial Performance
If the innocent party voluntarily chooses to accept partial performance when they have a genuine choice to refuse, they must pay a reasonable amount for the benefit received.
* Key Case: Sumpter v Hedges (1898) — A builder agreed to build two houses on the defendant's land. The builder ran out of money and abandoned the job half-finished. The landowner had no choice but to complete the buildings on his land. The court held the builder could not claim payment for the half-built houses because the landowner had no genuine choice to reject them. (However, the builder was paid for leftover building materials the landowner chose to use).
E. Time of Performance
Is finishing late a breach that discharges the contract? Generally, failure to meet a deadline is just a breach of warranty (damages only). Time is only "of the essence" (allowing termination) if:
1. The contract expressly states that "time is of the essence"; OR
2. The nature of the contract makes time critical (e.g. perishable goods); OR
3. The innocent party gives reasonable notice making time essential after a delay occurs.
Quick Summary: Performance
General Rule = Must be 100% complete and exact (Cutter v Powell).
Exceptions = Substantial performance, Divisible contracts, Prevention, Voluntary acceptance, Time of the essence.
2. Discharge by Breach
A breach occurs when a party fails to fulfill their contractual obligations without a valid legal excuse.
Types of Breach
1. Actual Breach: Failure to perform when performance is due (e.g. failing to deliver goods on the agreed delivery date, or delivering defective goods).
2. Anticipatory Breach: One party gives clear notice (by words or conduct) before the performance date that they will not perform.
* Key Case: Hochster v De La Tour (1853) — A courier was hired in April to begin a tour on 1 June. In May, the employer wrote saying his services were no longer needed. The courier sued immediately in May. The court held he did not need to wait until June to sue.
Options for the Innocent Party in Anticipatory Breach
When faced with an anticipatory breach, the innocent party has two choices:
1. Accept the repudiation immediately: Treat the contract as ended and sue for damages at once (Hochster v De La Tour).
2. Affirm the contract: Wait until the date of performance, give the other party a chance to perform, and sue if they fail (White & Carter (Councils) Ltd v McGregor [1962]).
Effect of Breach on the Contract
The right to treat the contract as discharged (terminated) depends on the type of term broken:
* Breach of a Condition: Entitles the innocent party to terminate future performance AND claim damages.
* Serious breach of an Innominate Term: If the breach deprives the innocent party of substantially the whole benefit of the contract, they can terminate and claim damages.
* Breach of a Warranty: The innocent party can ONLY claim damages; they must continue with their own obligations.
3. Discharge by Frustration
What happens if an unexpected event outside everyone's control happens after the contract is formed, making performance impossible or pointless? This is the doctrine of frustration.
The Definition of Frustration
Under Davis Contractors Ltd v Fareham UDC (1956), frustration occurs when an unforeseen, supervening event takes place after formation, without the fault of either party, which makes performance impossible, illegal, or radically different from what was undertaken.
Recognised Grounds for Frustration
1. Destruction of the Subject Matter (Impossibility):
* Taylor v Caldwell (1863) — A music hall was hired for concerts. Before the first concert, the hall burned down accidentally. The contract was frustrated, releasing both parties from their obligations.
2. Personal Incapacity / Unavailability:
* Condor v The Barron Knights (1966) — A 16-year-old drummer was contracted to perform 7 nights a week. He suffered a breakdown, and doctors advised he could only work 4 nights a week. The contract was frustrated because personal performance was essential.
3. Supervening Illegality:
* Fibrosa Spolka Akcyjna v Fairbairn Lawson Combe Barbour Ltd (1943) — An English company agreed to sell machinery to a Polish company. World War II broke out, and Germany occupied Poland. Trading with the enemy became illegal under English law, frustrating the contract.
4. Radical Defeat of the Sole Common Purpose (Commercial Frustration):
* Frustrated: Krell v Henry (1903) — A room was hired along the route of the coronation procession of King Edward VII. The king fell ill and the coronation was postponed. The sole purpose of hiring the room was to view the procession, so the contract was frustrated.
* NOT Frustrated: Herne Bay Steamboat Co v Hutton (1903) — A boat was hired to view the naval fleet review and cruise around the fleet. The royal review was cancelled, but the fleet remained. The contract was not frustrated because viewing the fleet was still possible; the sole purpose had not been destroyed.
Limitations: When Frustration Does NOT Apply
Courts apply frustration strictly. It will not apply if:
1. It is self-induced: The party's own choice or negligence caused the event (The Super Servant Two [1990]).
2. It is merely a "bad bargain" (more expensive or difficult): Increased costs or strikes do not frustrate a contract (Tsakiroglou & Co Ltd v Noblee Thorl GmbH [1962]; Davis Contractors).
3. The event was foreseen or provided for: If the contract contains a force majeure clause covering the event, or if the event was reasonably foreseeable at formation.
Financial Consequences: Law Reform (Frustrated Contracts) Act 1943
When frustration occurs, the contract automatically terminates. The financial consequences are governed by the Law Reform (Frustrated Contracts) Act 1943:
Section 1(2) — Money Paid or Payable:
* Money paid before the frustrating event is recoverable.
* Money payable before the event ceases to be payable.
* Court's discretion on expenses: The court may allow the payee to retain or recover expenses incurred in performing the contract, up to the amount of money paid or payable before the event.
Section 1(3) — Valuable Benefits:
* If one party has obtained a valuable benefit (other than money) before the frustrating event, the court may order them to pay a "just sum" for that benefit (BP Exploration Co (Libya) Ltd v Hunt [1979]).
Part 2: Remedies for Breach of Contract
When a breach occurs, the law provides remedies to resolve the harm caused. Remedies fall into three categories: Common Law Damages, Equitable Remedies, and Statutory Consumer Remedies.
1. Compensatory Damages (Common Law)
Damages are the primary common law remedy available as of right for any breach of contract.
The Aim of Damages
The goal is compensatory, not punitive. Under Robinson v Harman (1848), the purpose of damages is to put the claimant in the position they would have been in had the contract been properly performed.
Measures and Heads of Loss
* Expectation Interest (Loss of Bargain): The profit or benefit the claimant expected to receive from performance.
* Reliance Interest: Compensates for expenses incurred in preparing for or partially performing the contract before the breach (Anglia Television Ltd v Reed [1972]).
* Loss of Amenity: Awarded where the cost of cure is disproportionate, but the claimant suffered a loss of personal satisfaction or enjoyment (Ruxley Electronics and Construction Ltd v Forsyth [1996] — swimming pool built slightly shallower than specified, but safe to dive in).
* Mental Distress: Generally not recoverable in contract law, unless the central purpose of the contract was relaxation, peace of mind, or enjoyment (Jarvis v Swans Tours Ltd [1973]; Farley v Skinner [2001]).
Causation and Remoteness
To claim damages, the claimant must prove two things:
1. Causation: The breach must be the factual cause ("but for" the breach, would the loss have occurred?) and legal cause (no break in the chain of causation).
2. Remoteness of Damage: Losses cannot be too remote from the breach. The leading test comes from Hadley v Baxendale (1854), which sets out two limbs:
* Limb 1 (Objective / Normal Loss): Losses that arise naturally, according to the usual course of things, from the breach itself.
* Limb 2 (Subjective / Special Loss): Unusual losses that do not arise naturally, which are only recoverable if they were within the reasonable contemplation of both parties at the time the contract was made because special circumstances were communicated.
Key Remoteness Cases:
* Victoria Laundry (Windsor) Ltd v Newman Industries Ltd (1949) — A boiler was delivered 20 weeks late. The laundry company recovered normal lost profits (Limb 1), but could not recover lucrative, extraordinary profits from a special government dyeing contract (Limb 2) because the supplier had not been told about it.
* The Heron II (1969) — Delay in shipping sugar resulted in losses due to a falling market price; held to be naturally arising (Limb 1) because market fluctuations are foreseeable.
* Transfield Shipping Inc v Mercator Shipping Inc (The Achilleas) [2008] — Reaffirmed that liability depends on whether the defendant reasonably assumed responsibility for that specific type of risk.
Duty to Mitigate
The claimant is under a legal duty to take reasonable steps to minimise their loss. They cannot recover for losses that could have been avoided by reasonable action (British Westinghouse Electric and Manufacturing Co v Underground Electric Railways Co of London [1912]).
2. Equitable Remedies (Discretionary)
Unlike common law damages (which are available as of right), equitable remedies are granted at the discretion of the court when damages would be inadequate or unjust.
1. Specific Performance:
A court order compelling a party to carry out their positive contractual obligations.
* When granted: Usually for contracts involving land or unique goods where damages are inadequate.
* When refused: It will not be granted for contracts of personal service/employment (Ryan v Mutual Tontine Westminster Chambers Association [1893]) or where constant court supervision would be required (Co-operative Insurance Society Ltd v Argyll Stores (Holdings) Ltd [1998]).
2. Rescission:
Restores the parties to their pre-contract positions (restitutio in integrum). It is an equitable remedy primarily used in cases of misrepresentation or vitiating factors to set aside the contract from the beginning.
Key Equitable Maxims:
* "He who comes to equity must come with clean hands" (the claimant must have acted fairly).
* "Delay defeats equity" (the claimant must not wait an unreasonable time before suing).
3. Statutory Consumer Remedies: Consumer Rights Act 2015 (CRA 2015)
When a trader breaches statutory terms in a contract with a consumer, the Consumer Rights Act 2015 provides a clear hierarchy of statutory remedies.
Breach of Goods Terms (ss 9, 10, 11 CRA 2015)
1. Short-term right to reject (s20): The consumer can reject the goods and get a full refund within 30 days of delivery/ownership.
2. Right to repair or replacement (s23): The trader must repair or replace the goods within a reasonable time and without significant inconvenience to the consumer.
3. Right to price reduction or final right to reject (s24): If one repair or replacement fails, is impossible, or is not provided within a reasonable time, the consumer has the right to a price reduction or a final right to reject for a refund.
Breach of Services Terms (ss 49, 52 CRA 2015)
1. Right to repeat performance (s55): The consumer can require the trader to perform the service again to the required standard, at no extra cost.
2. Right to a price reduction (s56): If repeat performance is impossible or not carried out within a reasonable time, the consumer can claim an appropriate reduction in price (up to 100%).
Exam Pitfalls to Avoid
* Pitfall 1: Confusing Rescission with Termination/Repudiation: When a party breaches a condition, the innocent party has the right to terminate future performance. Do not call this "rescission"! Rescission unravels a contract from the start (ab initio) for vitiating factors like misrepresentation.
* Pitfall 2: Confusing Frustration with Mistake: Frustration only applies to events occurring after the contract is formed. If the music hall had already burned down before the contract was signed, that is common mistake, not frustration.
* Pitfall 3: Claiming Frustration for Bad Deals: Performance becoming more expensive or unprofitable is NOT frustration (Davis Contractors).
* Pitfall 4: Forgetting the 1943 Act: In a problem question on frustration, do not stop at declaring the contract frustrated. Always apply the Law Reform (Frustrated Contracts) Act 1943 (s1(2) for advance payments/expenses, and s1(3) for valuable benefits).
* Pitfall 5: Hadley v Baxendale Two Limbs: Always analyse both Limb 1 (losses arising naturally) and Limb 2 (special losses requiring actual notice at formation).
Summary Checklist
* Discharge by Performance: Strict rule (Cutter) vs Exceptions (Hoenig, Ritchie, Planché, Sumpter, Time).
* Discharge by Breach: Actual vs Anticipatory (Hochster, White & Carter); Conditions vs Warranties.
* Discharge by Frustration: Davis Contractors definition; Grounds (Taylor, Condor, Fibrosa, Krell); Limitations (Super Servant Two); Remedies under Law Reform (Frustrated Contracts) Act 1943.
* Damages: Purpose (Robinson); Remoteness 2-limb test (Hadley, Victoria Laundry); Duty to mitigate.
* Equitable Remedies: Specific Performance and Rescission (discretionary).
* CRA 2015: Goods (ss 20, 23, 24) and Services (ss 55, 56).