Discharge of contract refers to the ending of a contractual agreement between parties.
Entering into a contract creates legally binding rights and obligations for all parties to it, and by discharging the contract, those rights and obligations are no longer enforceable. This can either be because the terms of the contract have been fulfilled, or because the parties agree to end the contract.
Where there is a refusal or inability to carry out the obligations by one or more parties, this will also terminate a contract.
There are also statutory consumer rights that will allow a consumer to discharge the contract within a specific timeframe.
Depending on how the contract is discharged, there can be additional legal and financial consequences.
Failure to fulfil your obligations within a contract correctly can result in lengthy and costly legal disputes. It is critical therefore to ensure that you have discharged the contract appropriately to avoid any further liability.
Discharge of Contract by Performance
Discharging a contract by performance means the contract is satisfied by all parties carrying out the terms agreed within the contract. Performance is the preferred way of discharging a contract; however, disputes can arise regarding what constitutes ‘performance’.
What is Performance?
The general rule is that the parties to the contract must perform all the terms precisely in order for them to discharge their obligations.
There may be circumstances, however, where this doesn’t occur, yet a court would still find that performance has been carried out sufficiently to discharge the parties’ obligations. This can include situations such as where the terms of the contract consist of separate agreements that can be completed in isolation from each other.
Performance may also be seen as completed where one party voluntarily accepts partial performance of an obligation, and also where one party prevents the other from carrying out their duties.
Partial performance may also be accepted where there has been substantial performance of the terms, which means that the party has almost completed their entire contractual obligation. However, this is a complex area and what is considered substantial is again a matter for the courts.
For example in Re Moore & Landauer (1921), tins of fruit were contracted to be delivered in cases of 30 tins but were instead provided in cases of 24. The court held that substantial performance hadn’t occurred even though the number of tins that had to be delivered in total was the same.
Discharge by Agreement
It is also possible to discharge a contract by all parties agreeing to extinguish the rights and duties created by the contract. You can do this where parties still have rights existing in the contract (a ‘bilateral discharge’), or where only one party has rights remaining (a ‘unilateral discharge’). You can discharge a contract by agreement in situations where you want to:
- end the contract (usually for some other compensation);
- terminate the current contract and substitute it with a new one;
- vary the original terms; or
- for one of the parties to waive their right for the other to perform.
As the agreement is essentially a new contract between the parties, all agreements must be made by deed or all the necessary elements of a contract must be present to make the agreement binding.
How do I discharge a contract by agreement?
Various legal steps need to be taken in order to discharge a contract by agreement; particularly where the purpose is to vary or substitute terms. It is important therefore to seek legal advice before entering into any new or additional agreements.
Discharge of contract by frustration
Frustration of a contract occurs where, due to circumstances not considered at the time of the contract, the terms of the contract become impossible to perform, or the commercial purpose of the contract is no longer viable.
Examples of frustration include:
- Where, after the formation of the contract, the agreed actions of the parties become illegal
- Destruction of an object essential to performing the contract
- Incapacity of one of the parties (in a contract of personal service)
- Where a specified event vital to the contract doesn’t occur (there may be issues where there is more than one event)
- Government interference, such as in times of national emergency or war
- Unforeseen and excessive delays
The doctrine of frustration covers a wide range of circumstances which may end the obligations of the parties. However, its application is very narrow, and there are various elements the court will need to consider when looking at frustration, such as how long a delay must be before it is said to be frustrating and whether a specified event is deemed vital to the contract.
Frustration will not apply in circumstances where:
- The change only incurs an increase in expense or loss of profit to either party
- There is an alternative way to perform the duties
- There is an express provision within the contract that deals with frustration
- The frustrating event is self-induced
Relying on frustration to discharge contractual obligations can be complicated and difficult to enforce as it is only applicable in very narrow circumstances. However, in cases where frustration is appropriate, there are various remedies available.
The Law Reform (Frustrated Contracts) Act 1943 provides guidelines to ascertain losses arising from frustration. Specifically:
- Any money paid before the frustrating event can be recovered
- Any money due after the event is no longer payable
- Expenses incurred before the frustrating event can be recovered as long as they don’t exceed what would have been payable to you by the contract before frustration
- Where a party has obtained a valuable benefit from the contract (other than money) before the frustrating event, the court may order that party to pay a sum for receiving that benefit.
Each of these remedies can be applied in conjunction with one another, therefore you can recover any money and expenses already paid and you will not need to pay anything further. You may also be entitled to a sum where the other party has obtained a valuable benefit.
Even where frustration can be used as a way of discharging the contract, various complexities need to be addressed relating to money owed, expenses incurred and disputes regarding other benefits. Speaking to a qualified solicitor will provide you with the best advice on how to proceed.
Discharge of contract by breach
Discharging a contract by breach occurs where one of the parties either fails to perform their obligations (‘actual breach’) or by implying that they intend not to fulfil their duties when the time comes to perform them (‘anticipatory breach’).
What is an actual breach?
An actual breach occurs where there is a failure by one of the parties to perform the terms of the contract. This can be one or more of the terms depending on the seriousness of the breach.
What is an anticipatory breach?
An anticipatory breach arises where a party indicates prior to the performance of the terms of the contract becoming due, that they do not intend to carry out their contractual obligations.
What happens if a party breaches a contract?
If there has been an actual breach, there are various remedies available for the non-breaching party, including damages and injunctions. Anticipatory breaches are more complicated.
For an anticipatory breach, the non-breaching party doesn’t need to wait until the date that the performance was due to start, and can commence action immediately. There are specific rules surrounding acceptance of the breaching party’s intention that need to be fulfilled before action can be initiated.
In certain circumstances, an anticipatory breach also gives the non-breaching party the option to affirm the contract and demand that the breaching party perform on the due date.
If you think your contract may be subject to an anticipatory or actual breach, you should seek legal advice as soon as possible.
When should I seek legal advice?
The rules surrounding discharge of contract are complex, therefore whether you feel that another party to a contract is not fulfilling their obligations, or whether you would like to vary the terms of an existing contract, it is essential to seek professional legal advice from a qualified solicitor.