Business Law Part 3 – Discharge of Contracts
1 Overview
Having understood what constitutes the terms of a contract, we can now look into the ways to discharge a contract.
2 Discharge by Agreement
Discharge by agreement is simple and there is nothing to discuss.
- “Accord and satisfaction”
- An agreement to end the contract that is supported by consideration
- Alternatively, the existing contract provides for a way in which parties may terminate the contract.
3 Discharge by Performance
3.1 Full Performance
Discharging by full performance is generally straightforward to a reasonable person. The law clearly states that it does not care about small / microscopic / trivial deviations.
General Rule: Where parties perform what they have agreed to do under the contract, the contract comes to an end. Full performance must be precise and exact, subject to the de minimis principle (i.e. reasonably close to full performance, like 1 cent short of a billion).
- Context: Cargo was less than 0.01% outside the agreed range.
- Holding: It cannot be rejected.
- Context: Timber were specifically required to be 1/2 inch thick but turned out to be 9/16 inch thick (10% thicker).
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- Holding: It can be rejected.
3.2 Partial Performance (Entire vs Divisible Contract)
The essence of the discussion of entire vs divisible contract is whether the contract has to be considered as a whole or can be considered as separate sub-contracts. If a contract is divisible, then breach, termination and remedies of part of the contract means that the remainder of the contract remains intact.
For example, if you ordered 50 cups of bubble tea and received 30, you pay for 30 cups and sue for non-delivery of 20 cups (termination / damages).
Do note that Singapore law seems to heavily favour divisible contracts due to policy reasons (e.g. wastage). The phrasing of the contract does not seem to carry much weight (may be unless very explicitly stated that entire performance is expected before a single penny will be paid?).
3.2.1 Entire Contracts
General Rule: Lump sum contracts are not necessarily entire contracts (needs entire performance stated as a condition to payment).
- Context: Hoenig was an interior designed who agreed to furnish Isaacs’s flat for $750 and Isaacs only paid $400 and refused to pay the balance because of a defective bookcase and wardrobe.
- Holding: Entire performance was not a condition precedent to payment being paid. Hoenig was thus entitled to the contract price minus deductions for defects.
- Context: Explicitly stated in the contract that the condition for payment is the fulfillment of entire promise (payment made 10 days after the ship arrives at Liverpool provided he proceeds, continues and does his duty from hence to the port of Liverpool).
- Holding: The estate of the sailor who died could not recover for work he had done before his death as he died halfway.
General Rule (the doctrine of substantial performance): Where a party in breach has substantially performed his obligation under an entire contract, the innocent party must perform his obligation under that contract and settle for an action for damages for any loss suffered as a result of that breach. - Tan Boon Hai v Tan Kia Kok (2016)
Note: There is no good definition for “substantial performance”. Singapore court rulings have been in favor of contracts being divisible instead.
3.2.2 Divisible contracts
General Rule: A contract is divisible where X can demand counter-performance from Y corresponding to a specified part of the contract X has already performed.
4 Discharge by Breach
Breach: failure of a party to a contract, having no lawful excuse, to perform his obligation
4.1 Consequences of a Breach
- All breach entitles the innocent party to claim for damages
- Some breaches allow parties to terminate the contract
4.1.1 VERY IMPORTANT NOTE
It is important to note that termination means that contracting parties are freed from all future contractual obligations. Using the bubble tea example where you received 30 out of 50 cups but has yet to pay a single dollar. Even though you can sue for the breach of non-delivery of 20 cups of bubble tea, you still have to pay for the 30 cups because they are already delivered and it is your existing obligation to pay for them. Hence, in this case, there is not point discussing termination / affirmation of the contract under a breach. The situation will be different only if, for example, that there are two batches of bubble deliveries. In that case, the second batch of bubble tea need not be delivered / paid for.
4.2 How does discharge by breach occur?
- Situation 1: The term clearly states that, in the event of a certain event(s) occurring, innocent party may terminate.
- Situation 2: The party in breach renounces contract by conveying clearly to innocent party it will not perform its contractual obligation at all (repudiation).
- Situation 3(a) - Condition-Warranty Approach: The party in breach has breached condition.
- Situation 3(b) -“Hongkong Fir approach”: The party in breach has committed a breach, the consequences of which will deprive innocent party of substantially the whole benefit which it was intended he should obtain.
- Situations 2-3: Also apply to situations where there is anticipatory breach.
4.2.1 Situation 1
Situation: A term in the contract can state that a party may terminate if X event occurs.
- “in the event that your supply is unable to meet LTA’s requirements, or you are unable to continue your supply”
4.2.2 Situation 2
Situation: X, by words or conduct, renounces the contract by clearly conveying to Y that it will not perform its contractual obligations at all - unless X honestly (but wrongly) thought it was justified in renouncing.
General Rule: If X says it will perform the contract but in a manner substantially inconsistent with its contractual obligations, go under Situation 3 instead. - CAA Technologies Pte Ltd v Newcon Builders Pte Ltd (2017)
4.2.3 Situation 3(a) and 3(b)
To determine whether a term is a condition or warranty, we look at the intentions of the parties. It is important that both parties should objectively intend the term to be a condition, else it is a warranty. A condition means that breach of the term, regardless of the consequences (unless both parties clearly understand the consequences), immediately gives the innocent party the right to terminate the contract.
Types of Terms (Singapore Court Definition)
- Condition: Breach of this term gives the injured party the right to damages and right to terminate the contract.
- Warranty: Breach of this term gives the injured party the right to damages, and the right to terminate only if the breach deprives the injured party of substantially the whole benefit intended by the parties.
- Extremely limited exception: The term itself states expressly that any breach of it, regardless of the seriousness of the consequences that follow from that breach, will never entitle the innocent party to terminate the contract - Sports Connection v Deuter Sports GmbH (2009)
Step 1: Look at intentions to tell if it is a condition term (if not condition it is warranty). Some examples are:
- Parties may expressly state that a term is a condition - L Schuler AG v Wickman Machine Tool Sales Ltd (1974)
- Parties may state that “time is of the essence”. - Bunge Corporation v Tradax (1981)
- Courts are more likely to classify contractual terms as conditions in the context of mercantile transactions, especially where they are related to timing - Man Financial v Wong Bark Chaun David (2008)
- A statute may specifically classify a contractual term as a condition (e.g. Section 14(2) of Sale of Goods Act).
Step 2: If it’s a warranty, whether the breach gives the right to terminate depends on the consequences of the breach.
4.2.4 The Right to Elect
Terminate: Contract falls away except for the innocent party’s right to sue for damages, and can sue immediately.
Affirm: Contract remains in full effect as if nothing happened, innocent party must continue performing his own obligations and wait till the performance date to claim for the contract price (including damages).
4.2.5 Limits on the Right to Elect
General Rule: The right to elect to affirm the contract has been said to be unfettered.
- White display advertisement of McGregor for 3 years even if McGregor requested for contract to be cancelled but White refused and claimed for contract price after continuing for 3 years.
Ability to Perform: If innocent party cannot complete performance, he cannot affirm the contract.
- Seller cannot complete performance if buyer refuses to accept delivery of the goods.
Legitimate Interest (fishy): Law may restrict the right to elect to affirm if the innocent party had “no legitimate interest” in affirming the contract (financial interest alone is not sufficient, legal and economic interests). - The Alaskan Trader (1984)
- Generally the courts will not allow an innocent party to elect to affirm the contract if it would be “unrealistic, unreasonable and untenable”.
Mutual Breach: X can terminate if X and Y both breached separate conditions unless X’s breach is (1) continuing and (2) X’s breach is a condition precedent to Y’s breach - Alliance Concrete Singapore v Comfort Resources (2009)
4.2.6 How to terminate?
General Rule: Termination and acceptance of renunciation is sufficient to be clear and unequivocal - Vitol SA v Norelf Ltd (1996)
Timing: Innocent party must elect to either affirm or terminate within a reasonable period of time (while innocent party is deciding, contract remains in existence). - Stocznia Gdanska SA v Latvian Shipping Co (2002)
Timing: Court infer decision for you if you take too long. - Force India Formula One Team Ltd v Etihad Airways PJSC, Aldar Properties PJSC (2009)
5 Discharge by Frustration
5.1 Overview
5.1.1 VERY IMPORTANT NOTE
It is important to note that discharge by frustration has a VERY HIGH THRESHOLD for business because our Singaporean meritocracy does not like stupid businessmen :).
Also, the test, especially for the unforeseen requirement, has to be performed from the perspective of a reasonable person. It does not matter if the businessman is stupid, if a reasonable person should have foreseen it, then the test fails.
5.1.2 Requirements
Requirements for Discharge by Frustration
- The frustrating event cannot be self-induced.
- The frustrating event must be unforeseen.
- The frustrating event must render performance of the contract radically different.
5.2 Requirement 1 - Cannot be Self-induced
General Rule: External event that occurs without any wrongdoing by either party. - Alliance Concrete v Sato Kyogo (2014)
5.3 Requirement 2 - Unforeseen
General Rule: Insufficiency of labor and materials is not a frustrating event. - Davis Contractors v Fareham UDC (1956)
Force Majeure Clause: Doctrine of frustration will be displaced by a force majeure clause (contractually allocates risks between parties with regard to the occurrence of future events in specific circumstances stated in the clause itself). - RDC Concrete v Sato Kyogo (2007)
5.4 Requirement 3 - Radical Difference
5.4.1 Illegality
General Rule: Supervening change in law rendering performance illegal allows discharge by frustration.
- Context: James agreed to buy wood from Denny and war broke out with the government enacting the Control of timber Order 1939, which made trading under their contract illegal.
- Holding: Contract was frustrated.
5.4.2 General Impossibility
Destruction of Subject Matter: Item has so changed as to become an unmerchantable thing which no buyer would buy and no honest seller would see. - Asfar and Co v Blundell (1896)
- Context: Caldwell agreed to rent out music hall to Taylor but music hall was accidentally destroyed by fire (without fault of either party).
- Holding: Contract was frustrated.
Unavailability of Subject Matter: Contract frustrated.
- Context: Defendant agreed to charter a steamer to plaintiff but before delivery the steamer was requisitioned by the Government until after the start date.
- Holding: Contract was frustrated.
Unavailability of Subject Matter - Exception: Contract is not frustrated if there are more than one means to perform the contract.
- Context: Defendant agreed to transport claimant’s oil drilling rig from Japan to Rotterdam. Contract allowed defendant to use either SS1 or SS2, SS2 sunk before transport could begin but SS1 was also used for other contracts. Defendant transported the right with barge tower by a tugboat.
- Holding: Contract was not frustrated as an alternative was provided.
Failure of Method of Performance: Parties may have contemplated a certain method of performance. Contract is frustrated if the method stipulated was intended to be exclusive and becomes impossible.
- Context: AC supplied SK with ready mixed concrete (RMC) to build the boon Lay MRT extension. Indonesia banned sand exports to Singapore. AC had to make RMC using more costly Singapore’s stockpile.
- Holding: Contract was frustrated. Since both parties contemplated the use of Indonesian sand for the RMC’s preparation and whole market knew that Indonesia was the only source of sand. The sand ban was a supervening event that both parties could not control.
Failure of Method of Performance: Where a contract depends upon personal skill and the act of God renders it impossible, e.g. a painter struck blind, the contract is frustrated. - Hall v Wright (1859)
Frustration of Common Purpose: Failure of common purpose on which contract was based constitutes a radical change.
- Context: Plaintiff rented his flat to defendant for 2 days but not nights because the coronation of Edward VII would take place and pass along Pall Mall. The procession was postponed because of the illness of the King.
- Holding: The contract was frustrated as the court inferred that the proclaimed route was regarded by both contracting parties as the foundation of the contract.
Delay: In order for a delay to render a thing radically different, the delay must be also abnormal in its effect or expected duration so as to fall outside the reasonable contemplation of the parties at the time of contract.
- Context: DKC agreed to construct a reservoir for MWB in 6 years and the contract allowed for a generous extension of time for completion in many circumstances, WWI broke out a few months after the contract was formed.
- Holding: Contract was frustrated. War prohibited work from resuming until almost the end of 6 years, situation would be very different by then.
Exception: Mere impracticality or reduction in profits is not enough.
- Context: T agreed to sell Sudanese groudnuts to N from Port Sudan to Hamburgh but Suez Canal was closed to navigation due to war. T failed to ship the goods because the alternative route round the Cape of Good Hope was twice as long and far more costly.
- Holding: contract not frustrated.
- While a mere increase in prices of source materials alone was generally insufficient to constitute a “hindrance” or “prevention” that can constitute frustration, the issue was open as to what would be the legal position if the increase in price were astronomical
5.5 Effects of Frustration
Common Law: Both parties are automatically and prospectively discharged from contract by operation of law. - Alliance Concrete v Sato Kyogo (2014)
Frustrated Contracts Act
- If X paid Y before the contract was discharged, that money is recoverable subject to Y’s incurred expenses before the time of discharge to perform the contract. - Section 2(2)
- If X conferred a benefit to Y before the contract was discharged, X can claim a sum (not exceeding the value of the benefit) from Y. - Section 2(3)
- The court can find that a part of the contract can still be performed and thus hold that that part is not frustrated while holding that the other parts are frustrated. - Section 3(4)