Discharge of Contract — SQE1 FLK1 Contract Law

A gardener agrees to clear and replant a large garden for £6,000, payable when the work is finished. He clears about half the beds, plants nothing, then takes a better paid job and tells the owner he is not coming back. The owner pays another gardener £4,000 to finish. What does the first gardener get for the beds he did clear? Nothing.

That is the entire obligations rule, and it is the hardest edge in this topic. This is Discharge of Contract. Four ways out: performance, agreement, breach, frustration. Keep the gardener with you. By the end you will know why he recovers nothing, and why a decorator who hangs one strip of wallpaper crooked recovers almost all of his price.

Here is the route. Discharge by performance first, with the entire obligations rule and the exceptions that soften it. Then discharge by agreement. Then breach, where the innocent party has a choice to make. Then frustration, the narrowest doctrine of the four. Then the statute that cleans up the money afterwards, and the restitution claims that sit behind all of it.

Performance first, because it is how most contracts end. The general rule is strict. A party must completely and precisely perform every obligation before claiming payment or counter performance. That is the entire obligations rule. Perform 99% of the work and you recover nothing under the contract. Not a reduced sum. Nothing.

The case that fixed this is from 1795. A sailor agreed to serve on a voyage from Jamaica to Liverpool for 30 guineas. He died partway home. His widow recovered no part of the wages, because the obligation was entire: he had to complete the whole voyage to earn anything. Cutter v Powell. Harsh, and the law knew it. Four exceptions grew up around it.

The first and biggest is substantial performance. A party who has substantially performed can recover the contract price minus a deduction for the defects. A decorator finished a job with minor defects costing £56 to put right on a £750 contract. Substantial performance. He got the price, less the £56. Hoenig v Isaacs, from 1952.

Now hold that against a central heating system that gave off fumes and heated the house to 10% below the required temperature. Putting it right cost £174 on a £560 contract. Over 30% of the price. Substantial performance, or nothing at all? Nothing at all. No recovery under the contract. Bolton v Mahadeva, from 1972.

So the test is proportionality. Minor defects against the price: substantial performance and a deduction. Major defects: no contractual recovery whatever. That comparison is a favourite exam topic.

Second exception: divisible, or severable, contracts. Where the contract is split into stages with a price attached to each, each stage is earned as it is done. A contractor is due £15,000 on the foundations, £20,000 on the frame, £25,000 on the roof and walls, £10,000 on handover. He finishes the first two and stops. He has earned £35,000.

Third: prevention by the other party. If one side stops the other finishing, the party prevented can claim on a quantum meruit, the reasonable value of the work done. An author was commissioned to write a book for a series. The publisher cancelled the series before he finished, and he recovered for the work done. The rule is no shield for the party who caused the problem.

Fourth: acceptance of partial performance. If one party voluntarily accepts part performance, they must pay a reasonable sum for the benefit received. Note the word voluntarily. Back to our gardener. The owner is left with half the beds cleared on his own land. He has no real choice but to take it. That is not voluntary acceptance, and the gardener still gets nothing.

One related point. Tender of performance. Offer to perform properly, the other side refuses, and you are discharged from further obligation. For payment the debt remains, but you have a defence to any claim for non performance.

And timing. At common law, stipulations as to time are generally not conditions unless time is of the essence. If it is, missing the date is a repudiatory breach and the innocent party can terminate. Three routes to it. The parties say so expressly. The nature of the subject matter requires it, perishable goods, commercial sales. Or one party gives reasonable notice after the first deadline has passed.

There is a trap sitting in that last one, and we will come back to it. In equity, which prevails, time is presumed not to be of the essence in contracts for the sale of land. That changes only if the parties expressly say otherwise, or one of them serves a notice to complete.

Discharge by agreement next, and it is short. A contract is made by agreement, so it can be ended by agreement. The only question is consideration. Where both sides still have obligations outstanding, they can simply release each other. That is bilateral discharge, and each gives consideration by giving up the right to the other performing.

Where only one side still owes anything, it is harder. The other cannot release them for free. This is accord and satisfaction. The accord is the agreement to discharge. The satisfaction is the consideration for it. A owes B £1,000. B agrees to take £800 and a painting in full settlement. The painting is the satisfaction.

Waiver is the softer cousin. Waiver by election is where a party who knows they could terminate chooses to affirm instead. Waiver by estoppel, equitable forbearance, is where one party represents that they will not enforce their strict legal rights and the other relies on it. It may be retractable on reasonable notice, unless that party has irrevocably changed position.

And check the contract itself. Break clauses, termination for convenience, termination on insolvency: all valid, all enforceable, and the wording must be followed strictly. Three months written notice means exactly that.

Breach now, and start with what breach does not do. Not every breach discharges a contract. Breach of a warranty gives damages only. No right to terminate. Only a repudiatory breach does that: breach of a condition, or a sufficiently serious breach of an innominate term. Get that wrong and you are the one repudiating.

Three shapes of breach. Actual breach: the time for performance arrives and the party fails to perform or performs defectively. Anticipatory breach: before the time for performance, a party indicates by words or conduct that they will not perform. Renunciation: a clear and unequivocal refusal to perform, communicated to the other party.

An employer agreed to take on a courier from 1 June. On 11 May he wrote saying the services were no longer required. Sue in May, or wait until June? Sue at once. Hochster v De La Tour, from 1853, established anticipatory breach in English law. The renunciation is itself the breach.

Faced with a repudiatory breach, the innocent party has an election, and it matters. Accept the repudiation and terminate: both sides are released from future primary obligations, and the right to damages is preserved. Or affirm: the contract stays alive for both of them, and you claim damages when the breach actually happens.

Affirming can be worth real money. In one leading case an advertising firm was told to cancel a contract for advertising on litter bins on the day it was signed. It refused to accept the repudiation, displayed the advertisements for three years anyway, and sued for the full price. The House of Lords let it recover the price, not merely damages.

But affirmation carries two limits and one risk. The affirming party must have a legitimate interest in performing rather than simply claiming damages, and must be able to perform without the other side cooperating. That legitimate interest qualification is frequently tested. The risk: a contract kept alive can be frustrated by a later event, and the damages claim may be lost with it.

One more point on termination, and it catches people out. Termination for breach is prospective, not retrospective. It does not unwind the contract. Accrued rights survive, so debts already due stay payable, and clauses meant to survive keep working: arbitration, limitation, confidentiality.

Frustration last, and it is the narrowest doctrine here. After formation, a supervening event occurs without the fault of either party, and it makes performance impossible, illegal, or radically different from what was contemplated. The contract is then discharged automatically. Nobody elects. The courts apply the doctrine reluctantly.

The foundational case is from 1863. A music hall was hired for concerts and burned down before the first of them. Frustrated, on the basis of an implied condition that the hall would continue to exist. Taylor v Caldwell. That is category one, impossibility: destruction of the subject matter, the death or illness of someone essential to performance, the loss of a specific source the contract depended on.

Second category, illegality: a change in the law after formation makes performance illegal. Trade with an enemy in wartime is the classic. Third, and the subtlest, frustration of purpose. Performance is still physically possible, but the commercial point of the contract has gone.

A man hired a flat in Pall Mall to watch the coronation procession. The King fell ill and the coronation was postponed. The flat was still there and still usable, but the whole purpose was defeated. Frustrated. Krell v Henry, from 1903. Compare a case decided the same year, where a boat was hired to watch a naval review and cruise round the fleet.

The review was cancelled. Frustrated too? No. Watching the review was not the sole foundation of the contract, and the cruise still had value on its own. That is the line. Total destruction of the purpose, or merely part of it.

Now the things that are not frustration, because that is where the marks are. A contract that is merely more expensive or more difficult is not frustrated. A building contract that took 22 months instead of eight, because of labour shortages, was held not frustrated. More onerous is not radically different.

Nor is an event the parties foresaw or should have foreseen, where the contract allocated that risk. The listing of a building was a known risk, not a frustrating event. And frustration is never self-induced. A fishing company held licences for three of its five vessels. It allocated them to its own boats rather than the chartered one, and could not then call the charter frustrated.

And always check for a force majeure clause first. Force majeure is contractual, not a common law doctrine. It names the events it covers, war, pandemic, natural disaster, and says what follows.

So the contract is frustrated. What happens to the money? At common law, losses lay where they fell at the moment of frustration, which produced obvious injustice. The Law Reform (Frustrated Contracts) Act 1943 fixes that. It applies automatically to contracts governed by English law, unless the parties have contracted out.

Section 1(2) deals with money. Money paid before the frustrating event is recoverable, and money payable ceases to be payable. But the court has a discretion to let the payee keep or recover a sum not exceeding their actual expenses incurred before the event. A company pays a venue £30,000 in advance; the venue spends £8,000 on staging before the event becomes unlawful. The court can share that £8,000.

Section 1(3) deals with benefits that are not money. Where one party obtained a valuable benefit from the other performing before the frustrating event, the court may order a just sum. The leading case holds the benefit is the end product of the services, not the services themselves, valued at the time of the frustrating event. The aim is to prevent unjust enrichment, not to split losses evenly.

Four contracts sit outside the 1943 Act. Voyage charterparties. Contracts of insurance. Contracts for the sale of specific goods that perish, which go to s 7 of the Sale of Goods Act 1979 instead. And contracts where the parties made their own provision for frustration.

Behind all of this sits restitution, which is not a contractual claim at all. It reverses unjust enrichment where one party is enriched at the expense of another and it would be unjust to keep it. Money paid is recoverable where there is a total failure of consideration, now more often called failure of basis: you received nothing of what you bargained for.

And quantum meruit, as much as he has earned, gives a reasonable sum for work done. Four situations. The other party prevented performance. The contract was void or unenforceable. The contract was terminated for breach and the innocent party elects a restitutionary remedy. Or services were provided under an anticipated contract that never materialised.

A word on how SQE1 tests this. You will not be asked to recall case names or section numbers. You get a scenario, five answers, and one instruction: pick the best. So learn the rules and learn where the lines fall. The names in this episode are memory pegs, nothing more.

If you keep only three. Cutter v Powell, where nothing at all is earned until an entire obligation is finished. Hoenig v Isaacs beside Bolton v Mahadeva, where the size of the defects against the price decides whether you are paid. And Taylor v Caldwell, the music hall that burned down, which is where frustration begins.

Four traps the examiners set. One: land and time. In equity, which prevails, time is presumed not to be of the essence in a contract for the sale of land. A seller who misses the completion date is not automatically in repudiatory breach. The buyer must serve a notice to complete first.

Two: affirming for the sake of it. If the innocent party has no legitimate interest in continuing performance beyond inflating the claim, they should be confined to damages. And if they affirm and a frustrating event then occurs, the contract may be discharged by frustration and the damages claim for the original breach lost.

Three: force majeure before frustration. Always look for the clause. If it covers the event, the parties have allocated the risk themselves and frustration has nothing to do.

Four: no double recovery. A party generally cannot claim contractual damages for loss of bargain and restitution for unjust enrichment for the same loss. They must elect. They can combine the claims only where the two address different losses.

Quick check. A decorator refurbishes a flat for an agreed price of £12,000 and finishes the job. The client then finds one length of wallpaper slightly out of line and two door handles fitted upside down. A surveyor puts the cost of putting both right at £180. The client says this is not what he contracted for and refuses to pay anything at all. He has been living in the flat since.

Three candidate answers. One: nothing, because payment was due only on performing the contract exactly as agreed. Two: £11,820, the price less what it will cost to put the defects right. Three: the full £12,000, because defects this small are too trivial to affect the price. Pause here if you want a moment.

The answer is two. A party who has substantially performed may sue for the contract price, subject to a deduction for the cost of making good the defects. Misaligned wallpaper and two reversed handles at £180 against a £12,000 price is the paradigm of substantial performance. He recovers £11,820.

Why the others fail. One is the entire obligations rule in its unqualified form, and substantial performance is the established exception to it. Three fails because the deduction comes off the price as a matter of course. The client does not pay in full and then sue separately for the £180.

Five things to take away. One: the entire obligations rule means a party who stops short recovers nothing under the contract, which is why our gardener leaves with nothing for half a cleared garden. Two: the exceptions are substantial performance, divisible contracts, prevention by the other party, and voluntary acceptance of part performance.

Three: discharge by agreement turns on consideration, mutual release where both sides still owe, accord and satisfaction where only one does. Four: only a repudiatory breach gives a right to terminate, and the innocent party elects to terminate or affirm, with real consequences either way.

Five: frustration is automatic and narrow. It is unavailable where the event was self-induced, or where the contract allocated the risk. The Law Reform (Frustrated Contracts) Act 1943 adjusts the money afterwards. Next time, Remedies, Causation and Remoteness.

Practise this topic with exam-style questions at sqe1prep.co.uk. This episode is for education and exam revision only, not legal advice, and we are not affiliated with or endorsed by the SRA or Kaplan.