Discharge of a contract

Discharge of a Contract – Cambridge IGCSE/A‑Level (Topic 3.3)

A contract is discharged when the parties are released from their contractual obligations. Once discharged the contract has no further legal effect. The syllabus requires knowledge of three principal ways a contract can be discharged:

1. Performance (3.3.1)
2. Breach – actual and anticipatory (3.3.2)
3. Frustration (3.3.3)

Optional extensions – discharge by agreement and discharge by operation of law – are listed at the end for wider study.

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3.3.1 Performance

Definition: Discharge by performance occurs when the parties fulfil their contractual duties.

Strict (or entire) performance rule

• The promisee must perform exactly as stipulated; any deviation is a breach.
• Leading case: Cutter v Powell (1795) HL – a sailor’s widow could not claim a partial share of wages because performance was not exact.
• Statutory note: In consumer contracts the strict rule can be displaced by the Consumer Rights Act 2015, which allows a contract to be deemed discharged where goods/services are not of satisfactory quality.

Recognised exceptions to strict performance

1. Substantial performance – performance is essentially complete; any breach is minor and the contract is treated as performed, with damages payable for the shortfall.
   Hoenig v Isaacs (1952) EWCA.
2. Voluntary acceptance of partial performance – the promisee expressly accepts a lesser performance, thereby varying the contract.
   Bolton v Mahadeva (1972) EWCA (divisible contract).
3. Divisible contracts – the contract consists of separate parts that can be performed independently; each part may be discharged on its own performance.
   Same case as above.
4. Prevention of performance – if one party prevents the other from performing, the prevented party is discharged and may claim damages.
   Poussard v Spiers and Pond (1876) 1 QBD 410.
5. Tender of performance – offering to perform at the time and place stipulated (or a reasonable alternative) discharges the performing party’s obligations.
   Hochster v De la Tour (1853) 2 E & B 678 (early tender).
6. Time of performance – where performance is required at a specific time, performance at that time (or a reasonable delay) discharges the contract.
   British Westinghouse Electric & Manufacturing Co Ltd v Underground Electric Railways Co of London Ltd (1912) AC 673 (time is of the essence).
7. Vicarious performance – performance by a third party authorised by the contracte​e is sufficient.
   Lister v Romford (1957) 1 QB 215.

Exam‑style tip

When faced with a fact pattern, ask yourself in this order:

1. Is the contract whole or divisible? (If divisible, look for partial performance.)
2. Has the promisee accepted a lesser performance?
3. Is the performance substantially complete?
4. Was performance prevented or tendered early?
5. Is the time of performance a condition of the contract?
6. Was a third party authorised to perform?

Effect of full or substantial performance

• The contract is discharged; no further obligations remain.
• If performance is only substantial, the breaching party may be liable for the value of the incomplete or defective part (usually damages for loss).

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3.3.2 Breach

Definition: A breach occurs when a party fails to perform a term of the contract. Only a repudiatory breach (or a breach of an innominate term that is substantial) gives the innocent party the right to terminate (discharge) the contract.

Types of breach

• Actual breach – the breaching party does not perform (or performs incorrectly) when performance is due.
  Example: a builder fails to complete the roof on the agreed date.
• Anticipatory breach – before the time for performance, the breaching party indicates an intention not to perform or is unable to perform. The innocent party may accept the breach and treat the contract as discharged.
  Hochster v De la Tour (1853) 2 E & B 678 (anticipatory).

Classification of terms

Term type	Test for classification	Effect of breach	Typical example
Condition	Whether the term goes to the root of the contract (i.e., “essential”)	Automatic right to terminate & claim damages	Delivery of a specific car as the subject‑matter of the contract
Warranty	Minor term, breach does not affect the main purpose	Right to claim damages only; contract continues	Colour of the car being different from that advertised
Innominate term	Effect depends on the seriousness of the breach (see Hong Kong Fir)	If breach is repudiatory → right to terminate; otherwise only damages	Clause requiring “reasonable skill and care” in performing services

Key cases

• Condition breach: Cutter v Powell (1795) HL (sailor’s wages).
• Warranty breach: Bettini v Gye (1876) 1 QBD 433 – a singer’s failure to appear on time was a breach of warranty, only damages were awarded.
• Innominate term: Hong Kong Fir Shipping Co Ltd v Kawasaki Kisen Kaisha Ltd (1962) 2 QB 26 – the effect of the breach depended on whether it deprived the innocent party of substantially the whole benefit.

Repudiatory breach & effect

• The innocent party may elect to:
  1. Terminate (discharge) the contract, ending all future obligations, and claim damages for loss up to termination; or
  2. Affirm the contract and claim damages only, keeping the contract alive.
• Termination does not affect a claim for damages for loss suffered before termination.

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3.3.3 Frustration

Definition: A contract is frustrated when an unforeseen event, beyond the control of either party, makes performance impossible, illegal, or radically different from what was agreed, and the event was not caused by either party.

Categories of frustrating events

• Impossibility of performance – the subject matter is destroyed or physically unavailable.
  Taylor v Caldwell (1863) 3 B & S 826 (music hall burnt down).
• Supervening illegality – a change in law makes performance unlawful.
  Fibrosa Spolka Akcyjna v Fairbairn Lawson Combe Barbour Ltd (1943) 2 All ER 45 (wartime export restrictions).
• Radical change of purpose (or “radically different” performance) – the fundamental reason for the contract is destroyed.
  Krell v Henry (1903) 2 KB 740 (cancellation of the coronation procession).

Difference between impossibility and radical change of purpose

In Taylor v Caldwell the very thing to be performed (the hall) ceased to exist – a classic case of impossibility. In Krell v Henry the hall still existed, but the purpose (viewing the procession) was destroyed, making the contract “radically different” from what was originally contemplated.

Limitations – when frustration will NOT apply

• Contractual provision – a force‑majeure or similar clause allocating the risk defeats frustration.
• Inconvenience or additional expense – the event must make performance impossible, not merely more costly.
  Davis Contractors Ltd v Fareham UDC (1956) 1 WLR 286 (cost increase alone did not frustrate).
• Foreseeability – if the event was or could have been anticipated, the risk is on the parties.
  Paradine v Jane (1647) 2 St Tr 215 (war was foreseeable).
• Self‑induced frustration – a party cannot rely on frustration if they caused the event.
  Chandler v Webster (1904) 1 Ch 493 (plaintiff’s own negligence prevented performance).

Legal effect of frustration

• At common law the contract is automatically discharged; parties are released from future obligations.
• Historically, money paid before frustration could not be recovered (e.g., Taylor v Caldwell).
• The Law Reform (Frustrated Contracts) Act 1943 modifies this rule:
  • Section 1(2) – money paid before frustration may be recovered, but the court may allow the paying party to retain a sum that is a just contribution to the benefit received.
  • Section 1(3) – a party who has obtained a benefit after frustration must pay a just sum for that benefit.
  Statutory citation: Law Reform (Frustrated Contracts) Act 1943, s 1(2)–(3).

Practical illustration of the “just contribution” test (s 1(2))

Imagine A pays £10 000 for a bespoke sculpture. Before delivery, the workshop is destroyed by fire (frustration). A has received no sculpture but has benefited from the design work (which A can still use). The court may allow A to retain part of the £10 000 as a “just contribution” to the value of the design, say £2 000, and order the remainder refunded.

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Comparison of the Three Methods of Discharge

Method	Key principle(s)	Leading cases / statute	Effect on the parties
Performance	Strict (entire) performance; exceptions – substantial performance, voluntary acceptance, divisible contracts, prevention, tender, time, vicarious performance; consumer contracts may be displaced by CRA 2015.	Cutter v Powell (1795) HL; Hoenig v Isaacs (1952) EWCA; Bolton v Mahadeva (1972) EWCA; Poussard v Spiers and Pond (1876) 1 QBD 410; Hochster v De la Tour (1853) 2 E & B 678; British Westinghouse v Underground Electric (1912) AC 673; Lister v Romford (1957) 1 QB 215.	Contract ends; parties released. If only substantial performance, the breaching party may owe damages for the shortfall.
Breach	Actual vs. anticipatory breach; repudiatory breach of a condition or of an innominate term that is substantial; warranty breach gives only damages.	Hochster v De la Tour (1853) 2 E & B 678 (anticipatory); Hong Kong Fir Shipping v Kawasaki Kisen (1962) 2 QB 26 (innominate); Bettini v Gye (1876) 1 QBD 433 (warranty); Cutter v Powell (1795) HL (condition).	Innocent party may terminate (discharge) and claim damages, or affirm the contract and claim damages only.
Frustration	Unforeseeable, non‑fault event making performance impossible, illegal, or radically different; subject to limitations (contractual clause, foreseeability, self‑induced, mere cost increase).	Taylor v Caldwell (1863) 3 B & S 826 (impossibility); Fibrosa v Fairbairn (1943) 2 All ER 45 (illegality); Krell v Henry (1903) 2 KB 740 (radical change); Davis Contractors v Fareham UDC (1956) 1 WLR 286; Paradine v Jane (1647) 2 St Tr 215; Chandler v Webster (1904) 1 Ch 493; Law Reform (Frustrated Contracts) Act 1943, s 1(2)–(3).	Automatic discharge; parties released from future obligations. Statute permits limited recovery of money paid or payment for benefits received.

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Practical Checklist for 3.3 Questions

1. Identify the likely method of discharge: performance, breach (actual/anticipatory), or frustration.
2. If performance:
   • Is the contract whole or divisible?
   • Has the promisee accepted a lesser performance?
   • Is the performance substantially complete?
   • Was performance prevented or tendered early?
   • Is time of performance a condition?
   • Was a third party authorised to perform?
   • Check for any statutory provision (e.g., CRA 2015) that modifies the strict rule.
3. If breach:
   • Is the breach actual or anticipatory?
   • Classify the breached term – condition, warranty, or innominate term (use the table above).
   • Is the breach repudiatory (does it go to the root of the contract)?
   • Choose between termination or affirmation and state the consequent damages.
4. If frustration:
   • Identify the event – impossibility, illegality, or radical change of purpose.
   • Was the event foreseeable or self‑induced?
   • Is there a contractual clause allocating the risk?
   • Apply the test for frustration and consider the 1943 Act (possible recovery of money or payment for benefit).
5. State the legal effect on the parties – discharge, any surviving rights to damages, restitution, or contribution.

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Optional Extensions (broader study)

• Discharge by agreement – rescission, novation, accord & satisfaction.
• Discharge by operation of law – bankruptcy, death, statutory extinguishment (e.g., Limitation Acts).
• These topics are not examined under 3.3 but provide a fuller picture of how contracts can end.

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Suggested Diagram

Start → “Is performance complete?” → Yes → Discharge by Performance.
No → “Is there a breach?” → Yes → “Is the breach repudiatory or anticipatory?” → Yes → Discharge by Breach.
No → “Has a frustrating event occurred?” → Yes → Discharge by Frustration.
No → Contract continues.

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Summary

To master Topic 3.3 you must be able to:

• Explain the strict performance rule and each recognised exception, noting any statutory displacement (e.g., CRA 2015).
• Distinguish actual from anticipatory breach; classify terms as conditions, warranties, or innominate terms; and identify repudiatory breaches.
• Apply the frustration test, recognise its limitations, and understand the statutory adjustments under the Law Reform (Frustrated Contracts) Act 1943, including the “just contribution” principle.
• Analyse factual scenarios, select the correct method of discharge, and state the consequent legal effects (termination, damages, restitution).