This chapter examines the discharge of a contract by either performance or breach. The most significant issues are as follows:
Discharge by performance. The general rule is that performance must be precise and exact to discharge a contractor’s obligations. This has the following consequences:
448In an ‘entire’ contract (where payment only becomes due on complete performance), payment only has to be made when performance is fully completed – there is generally no payment for partial performance, unless:
the other party has prevented completion of performance; or
the partial performance has been accepted; or
the court deems there to have been ‘substantial performance’.
In a ‘divisible’ contract a party may be entitled to payment for completion of particular stages.
Time of performance. If performance is offered late, is the other party obliged to accept it? The general rule is that time is not ‘of the essence’ unless the parties have made it so. In particular:
under s 10 of the Sale of Goods Act 1979, time for payment is prima facie not ‘of the essence’ and so late payment is prima facie not a ground for rejection; but
the House of Lords did suggest that in commercial contracts, time is often of the essence.
Where time is of the essence, even a very short delay will entitle the other party to terminate.
Discharge by breach. Breach, however serious, does not necessarily create an entitlement to terminate a contract – a key question is when a breach entitles the other party to terminate (‘repudiatory’ breach). The answer, generally, depends on the type of term breached. The courts divide contractual terms into the following:
Conditions. Breach of a condition entitles the other party to terminate the contract (as well as claiming damages).
Warranties. Breach of warranty only entitles the other party to claim damages, not to terminate.
Innominate terms. The consequences of breach of an innominate term depend on the seriousness of the breach. If it deprives the other party of the main benefit of the contract, it will allow that party to terminate.
Long-term contracts. It may be difficult in a long-term contract to determine what level of breach will be repudiatory.
Instalment contracts. Similarly, there may be difficulties in determining how many instalments need to be defective to constitute a repudiatory breach.
Anticipatory breach. If a party indicates in advance that it is not going to perform, the other party may elect to terminate immediately, rather than waiting for the date for performance to arrive.