Discharge by Agreement

Parties to a contract can agree to discharge the contract that they have entered into, thereby releasing each other from unperformed obligations to that contract.

Where the parties agree to terminate a contract prior to performance, the mutual promise to release the other from obligations and not sue each other constitutes consideration.

The discharging agreement must fall under all the requirements for a valid contract. There are two types of discharge by agreements, they include:

Discharge of Executory Contracts

Discharge of a contract that has not been completely performed or executed by either party

Where a contract that is not required to be evidenced by writing any variation of the terms of the contract may be made by a purely oral agreements. However, where there is such a requirement the variation must also be so evidenced because the writing must contain all the terms.

The consequence of an oral discharging agreement will depend upon whether it simply:

    * Discharges the original contract:

An agreement to rescind the contract discharges the parties from the duty to perform their contractual obligations.

    * Discharges it and at the same time replaces it with another agreement between the parties:

If the obligations are replaced with new obligations, in which case that contract will probably be evidenced in writing. A contract terminating a prior agreement does not have to be in writing, even if the original contract was in writing.

    * Varies the original contract:

A variation to the contract will require evidence in writing, the contract may be validly rescinded by an oral agreement.

It was held in Morris v Baron & Co, per Viscount Haldane that an original contract must amount to a complete recision which should be the intention of both parties and not a mere desire of an alteration. The view that a minor contractual variation as the rescission of the prior contract and the submission of a new contract was rejected in this case.

However, in United Dominions Corp (Jamaica) Ltd v Shoucair it was stated that a variation did not rescind the original contract of the interest rate payable on a loan. It was held not to extinguish the prior debt and mortgage agreement.

Also, it was seen in Tallerman & Co Pty Ltd v Nathan’s Merchandise (Victoria) Pty Ltd, that if the parties agreement for rescission is contingent on the substitution of a new and enforceable contract, the rescission will not take effect if the subsequent agreement is unenforceable by reasons of a statutory requirement of writing.

Discharge of Executed Contracts

Mc Dermott v Black (1940) - Discharge of a contract where one party has completed performed or executed its obligations and the other has not.

A problem arises in respect of a contract to terminate an agreement where one of the parties has already performed their obligations. Such a party is not being release from any remaining duties to perform, so the other party cannot rely on that promise as consideration. To overcome this problem, contracts of discharge are often recorded in deeds of release Foakes v Beer (1884)

Discharge by Frustration

The emergence of the doctrine of frustration has provided that parties are excused from performance if supervening events dramatically affects the nature of the contract Taylor v Caldwell

OR

If, after the formation of a contract, an event occurs with the effect of rendering performance more onerous, less valuable, or impossible, a party may argue that the contract has been frustrated.

Elements of Frustration

What are the elements that you need to establish for a contract to be frustrated?

In National Carriers Ltd v Panalpina (Northern) Ltd [1981], Lord Simon listed the following elements of frustration:

- There must be a supervening event that "significantly changes the nature (not merely the expense or onerousness) of the outstanding contractual rights";
- There must be no fault in either party;
- The supervening event must not have been "reasonably contemplated by the parties" at the time of the contract;
- It must be unjust to hold the parties to the original contract.

2.0  Instances of Frustration

Impossibility of Performance

       * Destruction of the physical subject matter

The doctrine of frustration first emerged in cases where specific matter had been destroyed without the fault of either party. This is seen in,

Taylor v Caldwell

Facts: The defendants agreed to allow the plaintiff to use a Hall for a certain period (4 Days) for the purpose of concerts and fetes. The hall was destroyed.
Issue: Was the Hall the subject matter of the contract?
Held: The court held that the contract was discharged by this event, as the Hall was essential to the performance of the contract. The subject matter (Hall) must be essential to the performance of the contract

 

       * Death or incapacity of person in personal services contract

When the performance of a contract has a personal element, death or incapacity it may frustrate its performance. This is seen in, 

Simmons Ltd v Hay (1964)

A printery engineer was permanently incapacitated by illness, so that he
was not able to discharged his contractual duties, and the contract of employment was frustrated.

       * Supervening legal impossibility

Frustration involved the element of impossibility. Where performance by either or both of the parties is physically impossible. For example, if there is a change in law that makes the contract illegal. The illegality must go to the root of the contract – if the law just makes the contract more onerous then it still goes ahead. For example, in

Denny Mott & Dickson Ltd v James B Fraser & Co Ltd [1944]

Facts: A trading agreement provided, inter alia, for the purchase of pinewood. An order was made by the Defence Regulations (UK) which made it illegal to sell pine wood at a certain price and a later order prevented importation of the timber.
Held: The house of Lords held that as the trading of timber was the “main object” of the contract, it was frustrated once trading became illegal.

Frustration of Purpose
 
       * Non-occurrence of an event, which is the basis of the contract.

Frustration of the contract purpose was established in the principles of,

Krell v Henry (1903)

Fatcs: The plaintiff hired a room for the purpose to view the coronation and parade for Edward VII. However, the parade was cancelled and the court held that this frustrated the contract.
Held: The basis for the decision was that the parade was “regarded by both contracting parties as the foundation of the contract”.

       * Event cannot be caused by the parties to the contract (Self-induced Frustration)

Frustration may be regarded as self-induced by reason of default arising from an act or omission by a party, in which the self-induced act cannot frustrate the contract.

One cannot instigate an event and claim a contract is frustrated. A party to the contract must prove that a self-induced frustration occurred to prevent the contract being frustrated. This is seen in,

Joseph Constantine Steamship Line v Imperial Smelting Corp

The House of Lords held that the onus is on the party who makes the allegation that frustration was self-induced. In that case a vessel the subject of a charter party was damaged by an explosion, which rendered it impossible for the vessel to perform under the charter party. The cause of the explosion could not be established, and the owners were able to invoke the doctrine of frustration because the charterers could not establish that the explosion occurred by reason of the owner’s default.

The upshot of this case is that a party is not disentitle to rely on the doctrine by the mere possibility that the event alleged to frustrate the contract occurred as a result of its default.

Effects of Frustration (At common law)

At common law frustration automatically discharges the parties as to future obligations under the contract, but pre-frustration obligations are still enforceable.

The obligations that arose before the frustrating event are enforceable as seen in Chandler v Webster

However, this notion was overruled whereby the impact of frustration causes a total failure in consideration then the payer will be entitled to restitution before the frustrating event occurred. This was established in Fibrosa Spolka Akcyjna v Fairbairn Lawson Combe Barbour.

The House of Lords held that “the payment was a conditional payment on account of the price of the machinery there was a total failure of consideration and restitution was ordered.”

Effects of Frustration (Under Statute)

The Frustrated Contracts Act 1978 (NSW) was enacted to overcome the defects of the common law in regards to deposits paid before the contract becomes frustrated and there is a total failure of consideration.

Frustrated Contracts Act 1978 (NSW)

The first thing to note about the Act is that it does not apply to all contracts.
Under S.6 the Act does not apply to:

- A contract mad before 1 May 1979
- A charter party
- Carriage of goods by sea
- Insurance
- Contracts that the parties agree this Act is not to apply.

S.7
A promise that was to have been performed before frustration but was not so performed, is discharged, except to the extent that it is necessary to support a claim for damages brought by the other party for breach of contract.

S.8
Assessing damages in such a case the court must have regard to the fact that the contract has been frustrated.

S.10
Situations where one party has fully performed its obligation prior to frustration, the liability of the other party with respect to that performance. This section provides for payment, to the party who performed, of an amount equal to the “value of the agreed return for the performance”. Section 10 does not apply to situations where the obligation performed prior to frustration involves, in whole or in part, the payment of money: s. 9.

S.11
Where one party has partially performed its obligation prior to frustration, the liability of the other party is dealt with in s. 11. The section sets out a complex formula by which the compensation payable to the first party is calculated. Again s. 11 does not apply to situations where the obligation performed prior to frustration involves, in whole or in part, the payment of money: s. 9.

S.12
Deals with the situation where the obligation performed prior to frustration involves the payment of money. The section stipulates that such payments are to be returned to the other party, provided that the money paid by the first party was paid as consideration for performance by the other party.

S.13
Deals with the situation illustrated by the Fibrosa case, namely where expenditure has been incurred by one party prior to frustration and that expenditure is effectively wasted as a result of frustration. In such cases that amount of the wasted expenditure is equally apportioned between the parties.
If something can be salvaged from the partially completed work by the first party, then that too is equally apportioned between the parties.

S.15
Finally, it must be noted that the provisions set out in ss. 9-13 can be excluded by a court order if applying the provisions would be manifestly inadequate or inappropriate, or would cause a manifest injustice, or would be excessively difficult to apply. In such cases, by s. 15, the court can make orders in the form of money payments or otherwise as it considers proper.

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