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1st Report
Business Law

Report on Dischargement of
Contract

Submitted to: Mr. Rahat Aziz A

Submitted By: Danish Shakeel 7708
Zia Nasir
Kamil Mustafa
Saad Ahmed Chishty 7609
Umair Javed

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Discharge of contracts
1. Meaning and consequence of discharge

Discharge of contract means the termination of the contractual obligations of the

parties. On termination the parties are discharged, meaning that the parties are no
longer obliged to perform their future obligations (i.e. obligations which are not yet
due for completion).

2. Discharge in breach of contract

a. Breach occurred during performance

Contract term can be classified as: Conditions/warranties/innominate terms

i. Condition

If a reasonable person would find, irrespective of the extent of the actual breach, a
term of the contract to be so essential to the contract that its breach would deprive
the innocent party of most of the benefit of the contract, the term will be classified
as a condition. If a condition is breached, the innocent party may:

- choose to repudiate (terminate) the contract and sue for damages;

- choose to affirm the contract (i.e. not terminate the contract) and sue for damages
only.

If repudiation is chosen, the parties will no longer be bound by obligations that have
not yet arisen at the time of the repudiation.

ii. Warranty

On the other hand, if a reasonable person would find, irrespective of the extent of
the actual breach, a term of the contract to be not as essential as to deprive the
innocent party of most of the benefit of the contract, the term will be classified as a
warranty. And the breach of a warranty only entitles the innocent party to sue for
damages. The innocent party must fulfill the future obligations under the contract.

Example: There is a term in a contract, in which A sells her car to B, that A agrees
to wax and wash her car before delivery to B. A fails to do that. Since this is a
warranty, B will be bound to take delivery and pay for it, less damages against A
for A’s breach of contract.

iii.Innominate term

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The test for distinguishing condition and warranty is to ask what would a reasonable
person find at the start of the contract (which means without knowing the actual
breach). But there may be terms which are vague to be determinable at that stage,
and they will be classified as innominate terms. The court will consider whether the
extent of its breach will justify termination of the contract. The test is to ask
whether the breach of that term has, in fact, deprived substantially of the benefit the
other party under the contract1. In other words, the actual extent of a breach of an
innominate term must be examined to determine how serious it is. Where the breach
is serious, the innocent party can regard it as a breach of a condition. If the
consequences of the breach are not serious, the breach would only be regarded a
breach of a warranty.

Hong Kong Fir Shipping Co. Ltd. v. Kawasaki Kisen Kaisha Ltd.2
Facts: In the charterparty of 24 months between the plaintiffs and the defendants
there was a term that the ship should be in every way fitted for ordinary cargo service.
During the first few months of the contract, the ship was in fact unseaworthy because
of incompetent staff and mechanical problems. The repairs undertaken caused long
delays. When the charterparty still had 17 months to go, the defendants purported to
terminate the contract.
Held: the breach of the term on seaworthiness did not deprive the defendant
substantially of the whole benefit
Reason(s): The test is: whether the occurrence of the event has deprived the party,
who has further undertakings to perform, of substantially of the whole benefit, which
the innocent party could reasonably expect to receive from the contract.

In the case of a serious breach of an innominate term, if the innocent party elects to
repudiate the contract, this discharges both his/her future contractual obligations and
those of the defaulting party, which have not already been performed, and gives
him/her the right to sue for damages. Or an innocent party could affirm the contract
and sue only for damages.

The important difference between conditions and innominate terms is that there is no
right to terminate for breach of an innominate term unless the breach has had (or will
have) serious consequences for the promisee. When an innominate term is breached,
it is the seriousness of the actual consequences of the breach, rather than the nature
of the term, which determines the right of the promisee to terminate.

b. Anticipatory breach

Anticipatory breach is a breach before performance is due. Not every anticipatory

breach entitles the innocent party to terminate. If the refusal to perform is
absolute, the innocent party is entitled to terminate. Anything less than an
absolute refusal is subject to the same rules applicable to actual breaches.

Example: On 1 March A told B that A would not deliver goods to B on 5 March

as promised. If B chooses to repudiate, the contract is terminated from the time of

1
Hong Kong Fir Shipping Co. Ltd. v Kawasaki Kisen Kaisha [1962] 2 QB 26
2
[1962] 2 QB 26

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repudiation. B will not be bound to take delivery should A change his mind and
deliver the goods on 5 March. And B is entitled to sue for damages.

3. Discharge by performance

Naturally, if the contracting parties have fully performed their contractual duties,
which they agree to undertake, then the contract is fully discharged.

a. Entire obligation
The true construction of a contract may be that in a contract a party can only
discharge his/her obligations if the performance rendered is exact and entire.
If there is slightest deviation from the terms of the contract, the party not in
default will be entitled to say that the contract has not been performed in its
full sense. In this case the obligation is 'entire' in the sense that nothing short
of an entire performance could release a promisor from that contract. This is
usually the case of a contract where a lump sum is to be paid on the
completion of the whole project.

In Bolton v Mahadeva3, the plaintiff agreed to install a central heating system

for the defendant for 560 pounds. The system installed, however, failed to
heat the house adequately and gave off fumes. Defendant refused to pay.
Court held that the contract required entire obligation and the defendant,
therefore, did not need to pay.

b. Divisible obligations

With particular relevance to the building industry is the concept of divisible

obligations, in which the parties agreed that payment would be rendered by
installment upon completion of works at different stages. The court will treat
these contracts as severable and complete performance (of the whole contract)
is not necessary for the breaching party to enforce the other party’s promise.

Example: A building contract stipulates payment is to be made by the

developer (A) by 5 installments upon the corresponding satisfaction of 5
stages of work by the contractor (B). B could finish only the first 4 stages. B
could still claim for the payments for the first 4 stages, subject to A’s claim for
damages for stage 5’s work.

c. Contracts not of entire obligation or divisible obligations

If the contract is not one of entire obligation or divisible obligations, the party
in default may, however, have a claim for his/her performance in the following
situations:

i. Substantial performance
The party not in breach will not be discharged from his/her obligation under
the contract if the party in default has rendered substantial performance of
her/his obligations. What constitutes substantial performance is a question of
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[1972] 2 All ER 1322

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fact in the circumstances of the case. It is usually established if the

performance is not far short of the required performance and the cost of
remedying the defects is not too great in proportion to the overall contract
price (or, with reference to the principle in breach of contract, there is only a
breach of warranty or a not serious breach of an innominate term).

In Daikin v Lee4, the plaintiff builders contracted to repair for the defendant
for 1500 pounds. The defendant refused to pay on three grounds: the
underpinning of a wall was two feet thick instead of four feet; four inch solid
columns instead of five inch hollow ones had been used; the joists over a bay
window were not bolted as agreed. All defects could have been remedied at a
cost of 80 pounds. Held: Contract had been substantially performed and the
plaintiff might recover the contract price less the cost of rectification.

ii. Acceptance of partial performance

If the party in default has performed part of his/her duty and the innocent party
has accepted that partial performance, then the party in default will have a
claim in quantum meruit (a reasonable sum in respect of the benefit conferred
by the partial performance). It must be noted that partial performance applies
only if the innocent party has a genuine choice either to accept or to reject
partial performance (this could be so no matter it is a breach of condition,
warranty or innominate term, as even for a breach of condition or a serious
breach of an innominate term, the innocent party still has an option to affirm
the contract and sue only for damages).

In Sumpter v Hedge5, the plaintiff agreed to erect buildings on the defendant’s

land for 565 pounds. Part of the work was completed before the plaintiff gave
up the project. The defendant completed the building by building on the
foundation already finished by the plaintiff and using materials left on the site
by the plaintiff. Held: there was no acceptance of partial performance for the
part of building completed by the plaintiff, as there was no genuine choice (as
the defendant had to work on the foundation). But the defendant had to pay
for materials left by the plaintiff that he used (as there was genuine choice and,
therefore, acceptance of partial performance).

4. Discharge by agreement

Generally speaking, only a new contract can vary or extinguish an existing contract.
A simple contract may be discharged by a subsequent agreement, either written or
oral, supported by consideration.

If there has been only partial execution of the contractual obligations on each side, or
if there has been no performance of the obligation by either side, a simple agreement
between the parties will suffice to discharge the contract because there is a mutual
release of all further obligations under the contract. The consideration for the release
of one party from his contractual obligations is the converse promise from the other

4
[1916] 1 KB 566
5
[1898] 1 QB 673

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party. But if the other party has not given new consideration, the new agreement will
not discharge the original agreement.

Foakes v Beer6
facts: The appellant, who was a judgment creditor of the respondent, promised the
latter that she would not sue for the interest of the debt if the respondent agreed to a
plan of paying the debt itself. Afterwards, the appellant sue for the outstanding
interest.
held: The appellant could recover the outstanding interest, as the respondent provided
no new consideration.

5. Discharge by frustration

Our world is full of uncertainty. Although people would normally enter into contracts
after careful calculation, it is inevitable that the circumstances may change to the
disadvantage of either or both parties. Frustration of a contract takes place when
supervening events, which are unexpected and are not brought about by default of
either party, materially changes the nature of the outstanding obligations or rights from
what the parties could reasonably have contemplated at the time of contract. It would
be unjust to hold them to the literal sense of its stipulations in the new circumstances;
in such a case the law declares both parties to be discharged from the contract.

i. Instances of frustrations

a. Non-existence of subject matter

Taylor v. Caldwell7
Facts: the plaintiff rented a music hall from the defendant for holding music
concerts. A few days before performance the hall was accidentally destroyed
by fire.
Held: the contract was frustrated

b. Failure of common foundation

Krell v. Henry8
Facts: The defendant rented a room belonging to the plaintiff for the purpose
of overlooking the coronation ceremony of King Edward VII. On the material
day, due to the sudden deterioration of the King's health, all the ceremonies
were cancelled. The defendant refused to pay the balance of the rent.
Held: the contract was frustrated
Reason(s): "English law applies the principle [in Taylor] not only to cases
where the performance of the contract becomes impossible by the cessation of
existence of the thing which is the subject-matter of the contract, but also to
cases where the event which renders the contract incapable of performance is
the cessation or non-existence of an express condition or state of things, going

6
[1881-5] All ER Rep 106
7
(1863) 3 B & S 826
8
[1903] 2 KB 740

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to the root of the contract, and essential to its performance." (Vaughan

Williams LJ)

Herne Bay Steamboat Co. v. Hutton9 is another 'coronation case' in which the
defendant agreed by contract to let the plaintiff use his boat for viewing the
royal naval review. However, the Court did not agree that the contract was
frustrated because “the object of the voyage was not to see the review only,
but included a cruise round the fleet.”

c. Incapacity of promisor in personal services contract

Robinson v. Davison
A pianist engaged to perform at a concert was ill on the day. The contract was held to be
frustrated.

d. Supervening illegality

Fibrosa v. Fairbairn, Lawson & Co.10

Facts: On July 12, 1939, the respondents, an English company, contracted
with the appellants, a Polish company. The contract was made subject to a
clause which was as follows: ‘should dispatch be hindered or delayed … by
any cause whatsoever beyond our reasonable control, including … war … a
reasonable extension of time shall be granted.’ On September 1, 1939, war
broke out between Germany and Poland and on September 3 Great Britain
declared war on Germany
Held: the contract was frustrated

Codelfa Construction Pty. Ltd. v. State Rail Authority of New South Wales11
Facts: The defendant called for tenders for the extension of the railway line.
The plaintiff tendered on the basis that it would be able to work 24 hours a
day. The parties contracted on this basis since the Authority has the legal right
to work round the clock. Subsequently when the work was in progress, the
residents nearby obtained an injunction, which had the effect of limiting the
plaintiff's working hours.
Held: the contract was discharged
Reason(s): " [T]he contract work could not be carried out as contemplated by
the contract once the injunction were granted, the effect of which was to
prohibit the continuous three shift a day operations six days a week.
Performance by means of a two shift operation, necessitated by the grant of
injunctions, was fundamentally different from that contemplated by the
contract…." (Mason J)

ii. Non-frustrating events

a. Foreseeable and Foreseen events

9
[1903] 2 KB 683
10
[1943] AC 32
11
(1982) 149 clr 337

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The essence of frustration is that the performance of executory obligation

becomes fundamentally different or even impossible. If the supervening
events are foreseeable or actually foreseen, the court would not accept that the
contract is discharged by frustration.

Davis Contractors Ltd. v. Fareham U. D. C.12

Facts: The appellants, who were builders, had contracted to build houses for
the respondents. The progress was seriously delayed by the unexpected
shortage of labour and building materials. The appellants claimed that the
contract was frustrated by the increased costs.
Held: the contract remained intact, as it was foreseeable.

Walton Harvey Ltd. v. Walker & Homfrays Ltd.13

Facts: By an advertising contract the plaintiff had a right to display an
advertisement sign on the defendant's building for 7 years. A statute, which
provided for the power of compulsory acquisition, was enacted about 4 years
before the contract was entered into. Before the contract expired the
defendant's building was compulsorily acquired. The defendant claimed that
the contract was frustrated.
Held: No frustration, as the risk of the intervening event was actually foreseen
by the defendant.

b. Self-induced frustration

The doctrine only applies where the frustrating event comes about without the fault of
either party. A party cannot rely on a self-induced intervening factor to help
himself/herself out of a contract.

Maritime National Fish Ltd. v. Ocean Trawlers Ltd.14

Facts: The appellants hired a steam trawler from the respondents, together
with their four trawlers, for fishing. The appellant intended to fit the trawlers
with otter trawls therefore five applications were made to the Canadian
government as required by the law. Only three licences were granted. When
asked to name the trawlers to which the licences should apply, the appellants
did not list that of the respondents on the list.
Held: this was a self-induced frustration
Reason(s): ‘The essence of ‘frustration’ is that it should not be due to the act
or election of the party…. I think it is now well settled that the principle of
frustration of an adventure assumes that the frustration arises without blame or
fault on either side. Reliance cannot be placed on a self-induced frustration;
indeed, such contract might give the other party the option to treat the contract
as repudiated.’ (Lord Wright)

Legal consequences of frustration

12
[1956] AC 696
13
[1931] 1 Ch 274
14
[1935] AC 524

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Upon frustration, obligations that have not arisen before the frustrating event
(future obligations) are discharged according to common law. For obligations
that have already arisen or completed before the frustrating event s.16 of the
Law Amendment and Reform (Consolidation) Ordinance (LARCO; Cap.23,
Laws of Hong Kong) provides for the following:

a. money paid before the frustrating event is recoverable (s.16(2))

b. money payable before the frustrating event ceases to be payable (s.16(2))
c. if the party to whom the money was so paid or payable has incurred
expenses before the frustrating event occurred, in performance of the
contract, the court may, if it considers it is just having regard to all the
circumstances of the case, allow that party to retain (or recover) the whole
or part of the money paid or payable, not exceeding the amount of the
expenses. Such expenses can be recovered only if there is a sum paid or
payable under the contract already at the time of the frustrating event
(s.16(2))
d. a party who has received a valuable benefit under the contract before the
frustrating event can be ordered to pay to the other party whatever the
court think just, not exceeding that benefit (s.16(3)).

Tutorial

1. A Ltd, a developer, contracted with B Ltd, a builder, on 25 June, to build and

decorate four exhibition residential unit to showcase a residential building developed
by A. B was to finish the first unit by 1 July, the second by 5 July, the third by 10
July and the fourth by 15 July. B, however, after completing the first two units on
time, failed to meet the deadline for the third unit. On 13 July, since B had not yet
completed the third unit, A told B to stop the work. B, on the other hand, insisted that
they could finish the work for the two remaining units by 20 July. A, having lost faith
in B, instructed another builder, C Ltd., to complete the work. A did so because they
originally intended to let potential buyers visit the exhibition units when the building
would go on sale on 16 July. C completed by 17 July, and the start of the sale was
postponed to 18 July accordingly.

Advise A if they have a right to treat the contract as repudiated and if they can recover
a lost profit of $20,000,000 caused by the decrease in price resulting from the
downturn of the property market between 16 July and 18 July.

2. On 22 May Chan entered into a contract with Anna Lee, who just won an
Oscar for the movie “Lazy Tiger, Sleeping Dragon” she directed, to come to Hong
Kong to attend the movie’s premiere. The contract provided that Anna Lee should
arrive on 27 May and appear at the premiere in ABC Theatre, the largest cinema in
Hong Kong, on 30 May. Anna Lee would be provided with accommodation at a five-
star hotel, a round-trip first-class air-ticket, and $100,000 as remuneration. The
remuneration was paid to Anna Lee immediately on 22 May.

On 23 May Chan contracted with ABC Theatre, which has 2000 seats, for the 30 May
premiere. The hiring charge was $20,000, of which $10,000 was paid immediately as
deposit. The balance was payable after the premiere.

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On 26 May, the day on which Anna Lee was scheduled to depart for Hong Kong,
Anna Lee called Chan to say she could not come, as she had fallen ill. As Anna Lee
was the main attraction at the premiere and the tickets had not yet gone on sale, Chan
decided to cancel the contract with ABC Theatre and relocate the premiere to a
smaller cinema. ABC Theatre threatened to sue for breach of contract and claimed it
had already spent $3000 on decoration work for the 30 May premiere.

Advise Chan.

Would your answer be any different if in the morning of 23rd March City
Stadium was accidentally destroyed by fire?

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Attachment
Section 16 Law Amendment and Reform (Consolidation) Ordinance (Cap.23)

(1) Where a contract governed by law applicable to the Colony has become
impossible of performance or been otherwise frustrated, and the parties thereto have
for that reason been discharged from the further performance of the contract, the
following provisions of this section shall, subject to the provisions of section 17, have
effect in relation thereto.
(2) All sums paid or payable to any party in pursuance of the contract before the time
when the parties were so discharged (in this section and section 17 referred to as the
time of discharge) shall, in the case of sums so paid, be recoverable from him as
money received by him for the use of the party by whom the sums were paid, and, in
the case of sums so payable, cease to be so payable:
Provided that, if the party to whom the sums were so paid or payable incurred
expenses before the time of discharge in, or for the purpose of, the performance of the
contract, the court may, if it considers it just to do so having regard to all the
circumstances of the case, allow him to retain or, as the case may be, recover the
whole or any part of the sums so paid or payable, not being an amount in excess of the
expenses so incurred.
(3) Where any party to the contract has, by reason of anything done by any other party
thereto in, or for the purpose of, the performance of the contract, obtained a valuable
benefit (other than a payment of money to which subsection (2) applies) before the
time of discharge, there shall be recoverable from him by the said other party such
sum (if any), not exceeding the value of the said benefit to the party obtaining it, as
the court considers just, having regard to all the circumstances of the case and, in
particular-
(a) the amount of any expenses incurred before the time of discharge by the benefited
party in, or for the purpose of, the performance of the contract, including any sums
paid or payable by him to any other party in pursuance of the contract and retained or
recoverable by that party under subsection (2); and
(b) the effect,in relation to the said benefit, of the circumstances giving rise to the
frustration of the contract.
(4) In estimating, for the purposes of subsections (1), (2) and (3), the amount of any
expenses incurred by any party to the contract, the court may, without prejudice to the
generality of the said subsections, include such sum as appears to be reasonable in
respect of overhead expenses and in respect of any work or services performed
personally by the said party.
(5) In considering whether any sum ought to be recovered or retained under
subsections (1), (2), (3) and (4) by any party to the contract, the court shall not take
into account any sums which have, by reason of the circumstances giving rise to the
frustration of the contract, become payable to that party under any contract of
insurance unless there was an obligation to insure imposed by an express term of the
frustrated contract or by or under any enactment.
(6) Where any person has assumed obligations under the contract in consideration of
the conferring of a benefit by any other party to the contract upon any other person,
whether a party to the contract or not, the court may, if in all the circumstances of the
case it considers it just to do so, treat for the purposes of subsection (3) any benefit so
conferred as a benefit obtained by the person who has assumed the obligations as
aforesaid.

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