Valid reasons for non-performance

Various valid reasons can be used by a party to justify non-performance of his or her own obligations.

● A new agreement may have been made which replaces the existing one.

● Frustration (and therefore termination) of the existing agreement may occur because of some outside event for which neither party is responsible, which makes nonsense of the existing contract.

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● Serious breach by the other party may sometimes be a valid reason for the injured party to refuse to perform his or her own obligations.

New agreement

A new agreement may be made which either cancels or replaces the original one. The new contract must be a valid one. In particular it must be supported by consideration. Where obligations are outstanding on both sides there are no problems, for mutual promises to give up these rights constitutes consideration of the one for the other. This form of dis-charge is sometimes referred to as accord (agreement) and satisfaction (consideration).

However, where one party has completed his obligations under the existing contract there may be difficulties, and there must normally be new consideration to discharge the obliga-tions of the other. Alternatively, one party can release the other without consideration if this is done by deed (of discharge).

Frustration

A contract may validly be discharged, and therefore not performed, if some extraneous event beyond the control of either party destroys the whole basis of the agreement.

Examples

One instance might be subsequent physical impossibility if the subject matter upon which the contract depends is acci-dentally destroyed or rendered unusable.

In Taylor v. Caldwell (1886) a music hall hired for a series of concerts was accidentally burnt down beforehand with-out the fault of either party. This frustrated the hiring contract.

In Condor v. Barron Knights (1996) the drummer of a pop group became ill and was forbidden by his doctor to perform for more than four nights each week. This frustrated his contract, which required him to perform for seven nights.

Second, there might be some change in the law after the contract was made which rendered it illegal to perform the con-tract. Thus, an outbreak of war will frustrate a contract if to continue would be illegal as trading with the enemy (Avery v.

Bowden (1855) ).

Third, the basis of the contract might be removed when the whole agreement is dependent upon some future event which does not take place. The Coronation of Edward VII was postponed because of his illness and contracts to hire rooms along the route of the procession were frustrated (Chandler v. Webster (1904) ).

Fourth – and exceptionally – some other radical change in circumstances might occur which makes nonsense of the purpose of the existing agreement. What would now have to be performed would bear no relation to what was origi-nally intended. However, the change must be fundamental. Something which merely makes performance more difficult or expensive is no excuse.

In Metropolitan Water Board v. Dick, Kerr & Co. (1918), construction of a reservoir was stopped by the government for economic reasons throughout the war. It was held that the character and duration of this interruption, and the changed financial environment which affected everyone after the war, made nonsense of the original contract and ended it by frustration.

On the other hand, in Tsakiroglou & Co. Ltd v. Noblee & Thorl GmbH (1962), the closure of the Suez Canal in 1956, which led to a longer and more costly sea journey for the oil and shipping companies, and which made things more difficult for them, did not frustrate the contract.

At common law, frustration automatically brought the contract to an end. All sums pre-viously paid were recoverable and all sums not yet paid ceased to be due. This could have harsh results which was demonstrated by the Fibrosa Case (1943). An English company had agreed to supply machinery to a Polish company when the contract was frustrated by the outbreak of war. Despite the fact that the English company had already incurred expenses in manufacturing the goods, it was obliged to refund money already received on account and was left without any claim on the other party.

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As a consequence, the Law Reform (Frustrated Contracts) Act 1943 was enacted. The general common law rule above was restated but two qualifications were added to mitigate any inequity. If, before the date of discharge, a party has incurred expenses in performing the contract, the court has a discretion to allow him to retain all or part of sums already paid by the other party or to recover all or part of any sums due. If, by reason of anything done by the other party, one party has obtained a valuable benefit under the contract other than the payment of money, then the other party may recover such sum as the court considers just. In brief, the parties are returned to their original positions subject to the power of the court to make adjustments for expenses incurred and benefits received. Excluded from these provisions are contracts where the parties have expressly provided for frustration and contracts for the carriage of goods by sea, or marine insurance, and for the sale of specific goods which perish before risk has passed to the buyer; this last is covered by the Sale of Goods Acts 1979–1994.

Serious breach by the other party

Breach of contract by the other side is not necessarily a valid reason for non-performance.

Mere breach of warranty by the other party (see Section 3.2) is not a valid reason for non-performance. The claimant may recover damages, but he must still perform his own side of the bargain.

Even breach of condition by the other party does not automatically end the contract. It merely gives a claimant the right to end it, and refuse further performance by himself. If he does choose to exercise this right, then he must do so reasonably promptly (as with rescis-sion for misrepresentation – see Section 2.5). The right may therefore be lost very soon, particularly with perishable goods. The right may also be lost if the claimant has chosen to

‘affirm’ the contract, and go on with it knowing of the serious breach.

If a claimant exercises a right to end the contract, then this is a valid reason for no longer performing his own obligations. Otherwise, however, he must still perform his own side of the contract. The effects of breach are fully discussed in Chapter 4.

3.5 Summary

At the end of this chapter, students should make sure that they are familiar with the fol-lowing material:

● The normal terms of contract should be studied very carefully – in particular:

– conditions and warranties, and the differences between them;

– express terms and implied terms, particularly implied terms in contracts between a professional person and his client; at this point students should refer again to the situ-ations where a professional person can also be liable to a non-client.

● Exemption clauses are important, and students should make sure that they know about the attitude of the courts, and the effect of legislation such as the Unfair Contract Terms Act 1977.

● Discharge of a contract by performance and by agreement.

● Discharge by frustration.

● The results of breach of contract (briefly).

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