Discharge of a Contract for SQE1

Contract Law > Discharge of a Contract

Discharge is how a contract comes to an end. SQE1 tests your ability to identify the correct method of discharge — performance, agreement, breach, or frustration — and to apply the rules specific to each. Once a contract is discharged, neither party is bound to perform further, though accrued rights (such as a right to damages) survive. Discharge sits within the broader Contract Law framework and is closely connected to remedies for breach.

What Is Discharge of a Contract?

Candidates often confuse substantial performance with minor breach — a crucial distinction on SQE1. Substantial performance allows recovery minus a deduction; minor defects that deprive the innocent party of the whole benefit entitle them only to damages. This confusion costs marks.

Discharge is the termination of the parties' obligations under the contract. A contract can be discharged in four ways:

1. By performance — each party performs their obligations exactly as agreed
2. By agreement — the parties mutually release each other
3. By breach — a repudiatory breach allows the innocent party to terminate
4. By frustration — a supervening event makes performance impossible or radically different

Key Principles for SQE1

Discharge by Performance

• General Rule — Entire Performance:: A party must complete the whole of their obligation before they are entitled to payment (Cutter v Powell). This is strict: if performance is incomplete or defective, the party gets nothing.

• Substantial Performance Exception:: A party who has substantially (but not exactly) performed may recover the contract price less a deduction for the defective performance (Hoenig v Isaacs). Substantial performance requires that:

• The work is substantially complete

• The defect is minor and remediable

• The innocent party has received substantially the whole benefit

• Important distinction:: Substantial performance applies to minor defects in otherwise complete work. Where the defect is fundamental and deprives the innocent party of substantially the whole benefit, substantial performance does not apply (Bolton v Mahadeva).

• Divisible Contracts:: If the contract is divisible into separate stages or milestones, payment may be due for completed stages even if the whole contract is incomplete.

Discharge by Agreement

The parties agree to release each other from their obligations.

• Bilateral discharge:: If both parties have outstanding obligations, each party's promise to release the other provides consideration. The agreement is binding.

• Unilateral discharge:: If only one party has outstanding obligations, the release must be by deed or supported by fresh consideration (accord and satisfaction).

Discharge by Breach

• Repudiatory Breach:: A repudiatory breach entitles the innocent party to elect to terminate the contract and claim damages. Repudiation includes:

• Breach of a condition

• A sufficiently serious breach of an innominate term (depriving the innocent party of substantially the whole benefit)

• Critical point:: Not every breach is repudiatory. A breach of a warranty, or a minor breach of an innominate term, gives only a right to damages, not termination.

• Anticipatory Breach:: An anticipatory breach occurs where a party indicates before the due date for performance that they will not perform (Hochster v De La Tour). The innocent party can:

• Accept the repudiation and treat the contract as discharged immediately, suing for damages

• Affirm the contract and wait for the performance date, but risks a supervening frustrating event

Quick Comparison Table

| Discharge Method | When Available | Effect | Innocent Party Must... | |---|---|---|---| | Performance | Both parties complete obligations | Contract ends by mutual completion | Complete their side | | Substantial Performance | Work substantially complete, minor defects only | Party recovers price minus deduction | Accept the substantially complete work | | Agreement | Both agree to release | Contract discharged by mutual consent | Agree (or provide fresh consideration if one-sided) | | Repudiatory Breach | One party commits repudiatory breach | Innocent party may terminate + claim damages | Elect to accept repudiation or affirm | | Anticipatory Breach | Party indicates inability to perform before date | Innocent party may accept immediately or wait | Choose acceptance or affirmation | | Frustration | Supervening event makes performance impossible/illegal | Contract discharged automatically | Do nothing; Act governs financial consequences |

Discharge by Frustration

• Doctrine of Frustration:: The contract is automatically discharged when a supervening event, for which neither party is at fault, makes performance:

• Impossible (Taylor v Caldwell — destruction of subject matter)

• Illegal — supervening law renders performance unlawful

• Radically different from what was contemplated (Krell v Henry — hire of room to view coronation cancelled)

• Critical thresholds:

• The frustrating event must be unforeseeable or not provided for in the contract

• Increased difficulty, expense, or reduced value is not frustration

• The event must be fundamental, not trivial

• Frustration does NOT apply when:: 1. The event was foreseeable — parties should have provided for it 2. The contract allocates the risk — a force majeure clause 3. The event was self-induced — one party brought it about (Maritime National Fish Ltd v Ocean Trawlers Ltd)

Law Reform (Frustrated Contracts) Act 1943

The 1943 Act adjusts the financial consequences of frustration:

• Money paid before frustration is recoverable (s.1(2)) — reversing the old rule in Chandler v Webster
• Money payable before the frustrating event ceases to be payable — no further payments due
• The court may allow a party to retain or recover a just sum for expenses incurred before frustration or valuable benefit conferred (s.1(3))

Exam tip

Frustration is automatic — it operates by operation of law. The parties cannot choose whether frustration applies. But the 1943 Act gives the court discretion on financial consequences. Watch for scenarios where a party argues for recovery of wasted expenditure — the Act does not provide this.

How This Appears in SQE1 Questions

SQE1 questions typically present a scenario where performance has been disrupted and ask how the contract is discharged. This is one of the most commonly tested areas in SQE1. Common traps include:

• Applying frustration where the event was foreseeable or self-induced
• Confusing substantial performance with partial performance — Hoenig v Isaacs vs. Bolton v Mahadeva
• Failing to distinguish repudiatory breach from minor breach — only repudiation allows termination
• Misunderstanding anticipatory breach — the innocent party's election matters
• Forgetting that frustration is automatic — parties cannot choose; the 1943 Act governs financial recovery

Common Mistakes Students Make

• Confusing substantial performance with partial performance — Hoenig v Isaacs (minor defects, recovery) vs. Bolton v Mahadeva (fundamental defect, no recovery)
• Applying frustration to foreseeable events, self-induced events, or those provided for in a force majeure clause
• Treating every breach as repudiatory — only breach of a condition or sufficiently serious innominate breach allows termination
• Forgetting the innocent party's election in anticipatory breach — they can accept immediately or affirm
• Assuming wasted expenditure is recoverable under the Law Reform (Frustrated Contracts) Act 1943 — the Act covers money paid, not pre-contract spending

Want to test your understanding of discharge? Try a few SQE1-style questions below before moving on.

Quick Summary

• Entire performance rule: A party must complete their whole obligation before claiming payment; substantial performance allows recovery minus a deduction for minor defects.
• Discharge by agreement: Both parties must consent; bilateral discharge needs no fresh consideration; unilateral needs a deed or fresh consideration.
• Repudiatory breach: Only breach of a condition or serious breach of an innominate term allows termination; minor breaches give damages only.
• Anticipatory breach: The innocent party can accept the repudiation immediately or affirm and wait; the choice has different consequences.
• Frustration: Automatic discharge when a supervening event makes performance impossible, illegal or radically different; must be unforeseen and not allocated by contract.
• Law Reform (Frustrated Contracts) Act 1943: Money paid before frustration is recoverable; the court may allow retention for expenses or valuable benefit.

Want to test this now? Try a few SQE1-style questions below before moving on.

Test Yourself

Related Topics

• SQE1 Contract Law: Complete Guide
• Formation of a Contract for SQE1
• Terms of a Contract for SQE1
• Remedies for Breach of Contract for SQE1

Practise Discharge Of Contract Questions for SQE1

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