TERMS, DISCHARGE AND BREACH OF A

CONTRACT L3
OBJECTIVES:
Provide guidance on understanding of:
a. terms of a contract
b. discharging a contract
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I. INTRODUCTION
1.1 Express Terms of Contract
Express terms - terms of the agreement which they
have set out, whether in writing, orally or a
mixture of the two
Conditions - most important terms of the contract
which form its main purpose. If broken, may
cancel contract and claim damages.
Warranties - less important terms of the contract.
If broken, cannot cancel but can claim damages.
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I. INTRODUCTION
package holiday contract - express terms
usually set out in the booking conditions.
tour operator should remind the client on
the booking conditions as part of the
contract.
1.2

Implied Terms of Contract

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I. INTRODUCTION
EXAMPLE
Harry booked a holiday with Cheap Holidays Ltd
which included 14 nights accommodation at a
hotel in Malaga, Spain. When he arrived he was
amazed to discover that his room did not have a
bed. The hotelier offered to hire him a bed for
1600 pesetas (approximately HKD130) per night.
The holiday representative was unhelpful and told
him that he would have to pay or sleep on the
floor. On his return he claimed a refund of
HKD1820. The tour operator pointed out that
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there was no mention of beds in the brochure.

I. INTRODUCTION

The reasonable person would argue that it

is implied that when a holidaymaker books
a room he or she is entitled to be provided
with a bed as part of the price.

I. INTRODUCTION
CASE
Wong Mee-wan (the personal representative of Ho
Shui-yee) v
Kwan Kin Travel Services Ltd.
[1995] 2 HKLR 541
HSY travelled to the PRC under a package tour
arranged by KKTS. On their arrival at a lake, the
travel group had missed the ferry and so a
speedboat was arranged. The speedboat was
driven by someone who was not competent, it
collided with another boat and HSY drowned. Her
mother claimed damages for breach of contract. 6

I. INTRODUCTION
It was held that KKTS undertook to provide, and not
merely arrange, all the services included in the
programme, even though some of the activities were
to be carried out by others. KKTS were therefore
bound to ensure that all the services were performed
with the exercise of reasonable care and skill. The
trip across the lake was not carried out with
reasonable care and skill in that no steps were taken
to see that the driver of the boat was competent.
KKTS was liable for breach of contract.
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I. INTRODUCTION
1.3 Tickets
ticket is not a written contract.
A travel ticket is a voucher - evidence of the right
to travel in the manner indicated.
Most airline, ferry, rail and coach tickets refer to
by-laws or conditions subject to which the
passenger is being carried. Passengers are bound
by those conditions or by-laws if they were clearly
referred to on the ticket.
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I. INTRODUCTION
CASE
Thompson v London Midland & Scottish Railway
[1930] 1 KB 41
Mrs. Thompson was injured alighting from a train
because of the LMSs negligence. Mrs. Thompson
could not read and the ticket was bought for her by
a relative. Despite this her claim did not succeed
because an exemption clause found on p. 552 of a
separate timetable which cost 6d was held to
apply! The court took the view that the issue of a
railway ticket ought to indicate to a reasonable
person that there were conditions attached to it.
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I. INTRODUCTION
1.4 Exclusion and exemption clauses
An exemption clause (also known as an exclusion
clause) attempts to deprive the innocent party of
his/her remedies.
A limitation clause attempts to restrict the
available remedy.
Exemption clauses are regarded as fair when they
are the result of negotiations between the parties,
the parties have equal bargaining power, and their
intentions are clear.

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I. INTRODUCTION
CASE
McKay v Scottish Airways
[1948] SC 254
The pursuers sought damages against an airline
because one of their relatives had been killed in a
crash caused by the airlines negligence.
The action failed because of an exemption clause
in the contract of carriage which exempted the
airline from liability for breach of contract for
failing to carry a passenger safely as well as
exempting the company from its duty to pay
damages for harm caused by its negligence.
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I. INTRODUCTION
CASE
Olley v Marlborough Court Ltd
[1949] 1 KB 532
Furs were stolen from a guests hotel bedroom,
after the door was locked. On one of the rooms
walls was a notice purporting to exclude the hotel
from liability.
Held. When the guest sued the hotel the court
decided that the notice had not been incorporated
into the contract since the contract was in fact
made at reception before the guest was shown the
room.
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I. INTRODUCTION
Those clauses which are incorporated into
the contract (e.g., signing the contract) and
which, on a strict construction, actually
apply to the situation in question will be
upheld, even if the clause is legible but in
small print.

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I. INTRODUCTION
CASE
Anglo-Continental Holidays Ltd. v Typaldos Lines
(London) Ltd.
[1967] 2 Lloyds Rep. 61
A group of Jewish school children were booked on a
cruise. The cruise was to include a two-day stop at
Haifa, enabling them to visit Jerusalem and Galilee.
A week before departure they were informed that
they would be traveling on a ship of inferior quality
to that originally booked and that
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I. INTRODUCTION
they would be stopping Haifa for only eight
hours, not giving them enough time to visit
Galilee. The plaintiffs cancelled the cruise,
refunded their clients money and sued the
defendants for breach of contract. The
shipowners relied on a clause in the
handbook which indicated steamers,
sailing, rates and itineraries are subject to
change without prior notice.
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I. INTRODUCTION
Held. Lord Denning M. R. said:
In my opinion a steamship company cannot rely
on a clause of this kind so as to alter the substance
of the transaction. For instance, they could not
say: We will change you from this fine modern
ship to an old tramp. Nor could they say: We are
taking you to Piraeus instead of to Haifa No
matter how wide the terms of the clause, the
Courts will limit it and modify it to the extent
necessary to enable effect to be given to the main
object and intent of the contract.
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I. INTRODUCTION
Applied to this case we have to ask
ourselves: Was the proposed trip by the
Anjelika in substance a performance of the
contract or was it a serious departure from
it? To my mind there is only one answer. It
was a radical departure.

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I. INTRODUCTION
The change from the 22,000 ton Atlantica (with
two swimming pools and lots of accommodation0
to this small old crate (as one of the witnesses
called the Angelika) was itself substantial
departure. But most important of all was the
shortened time at Haifa. The climax of the trip for
these Jewish boys and girls was two days at Haifa,
whereas they were only to have eight hours. The
defendants cannot excuse it by reliance on the
clause.
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I. INTRODUCTION
Liability for death or personal injury
resulting from negligence cannot be
excluded or restricted by any contract
provision or notice.
reasonableness test

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I. INTRODUCTION
Limitation clauses in relation to claims for death,
personal injury and loss or damage to luggage are
very common in the tourism and hospitality
industries. These limitation clauses have been agreed
at an international level as part of the international
regulation of civil aviation, shipping, road and rail
travel by the Warsaw Convention for the Unification
of Certain Rules Regarding Air Transport 1929 (as
amended), the Athens Convention relating to the
Carriage of Passengers and Their Luggage by Sea
1974, the Convention for the International Carriage
of Passengers and Luggage by Rail 1961 and the
International Convention for the Carriage of
Passengers and Luggage by Road 1974 respectively.
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I. INTRODUCTION
The Common Law Rules
(a) The exclusion clause must be incorporated into
(i.e., have become a part of) the contract, e.g.,
signing the document
(b) If the meaning or scope of the exemption clause
is misrepresented by the business to the consumer,
then the business cannot escape liability.
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I. INTRODUCTION
(c) must show that reasonable steps have been
taken to bring the clause to the notice of the other
party.
(d) previous course of dealing included an
exclusion clause, then this may have been
incorporated into the new contract.
Control of Exemption Clauses Ordinance (enacted
in 1990) completely ruled out exemption clauses
that try to exclude liability for personal injury or
death if used by someone in business.
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II.

DISCHARGING CONTRACTS

2.1 Discharge by Performance.

When all of the promises of a contract have been
performed - discharged.
Performance of a contract must be precise and exact.
EXAMPLE
If A contracts to sell and deliver 50 tonnes of rice to
B, and B promises to pay $10,000, cash on delivery, A
must perform his promises before he can sue for the
price.
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II.

DISCHARGING CONTRACTS

The right to sue on a contract depends on

complete performance, or, if the other party is
in breach, on a willingness to perform his
own promises.
EXAMPLE
In the situation given above, if A fails to
deliver, B can sue A for non-delivery,
provided B is willing to pay the agreed price.
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II.

DISCHARGING CONTRACTS

2.1.1
Partial Performance of a Contract
performance of half of the contract does not
entitle a party to claim half the price.
entire contract vs. severable contract

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II.

DISCHARGING CONTRACTS

CASE

Bolton v Mahadeva
[1972] 2 All ER 1322
The plaintiff installed a central heating system in the
defendants house, and the price agreed upon was a
lump sum of 560. The plaintiff did not do the work
properly, and the cost of putting the system right would
be another 179.
The Court of Appeal said that this was an entire
contract to do the work properly for one lump sum.
Since the plaintiff had not performed his work properly,
he could not recover money for the partial performance.
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II.
CASE

DISCHARGING CONTRACTS
Cutter v Powell
[1775-1802] All ER Rep159

The defendant (Powell) agreed to pay Cutter 30 guineas

provided he proceeds, continues and does his duty as
second mate on the Governor Parry, a ship which was to
travel from Jamaica to Liverpool. Payment was to
become due ten days after the arrival of the vessel, but
Cutter died before the vessel arrived at Liverpool. He had
served on board the ship for about seven weeks.
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II.

DISCHARGING CONTRACTS

It was held that his widow could not recover anything

for the work he had done. The contract was said to be
entire; nothing was to be paid unless Cutter had
performed his entire duty under the contract. A more
accurate phrase than an entire contract would be an
entire obligation, because in such a contract the
consideration is usually a lump sum which is payable
upon complete performance by the other party.
The rule laid down in Cutter v Powell in relation to
entire contracts was that, unless the contracting
party had performed the whole of his/her contract,
s/he was not entitled to recover anything.
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II.

DISCHARGING CONTRACTS

2.1.2
Severable Contracts
contract is separable into parts
- the party in question is entitled to payment
when he has performed some parts of what he
undertook to do
The SOGO (Sale of Goods Ordinance)
provides, in s 33(2):
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II.

DISCHARGING CONTRACTS

Where there is a contract for the sale of goods to

be delivered by stated installments, which are to
be separately paid for, and the seller makes
defective deliveries in respect of one or more
installments, or the buyer neglects or refuses to
take delivery of or pay for one or more
installments, it is a question in each case
depending on the terms of the contract and the
circumstances of the case, whether the breach
giving rise to a claim for compensation but not to
a right to treat the whole contract as repudiated. 30

II.

DISCHARGING CONTRACTS

2.2 Discharge by Agreement

Discharge by agreement occurs where A promises to give up
his rights under the contract in return for a promise by B to
give up his rights.
discharged automatically upon some events
- after a fixed period of time
by giving notice to the other.
For example, an employment contract may provide as follows:
.
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II.

DISCHARGING CONTRACTS

(a) Where an employer gives an employee notice of

termination of employment, the parties may mutually
agree to the employment ending at any time after the
giving of the notice and before the expiration of the
period of the notice; in such a case, wages shall be
paid only up to the time of the agreed termination.
(b) A party may terminate the employment contract
by giving to the other party not less than one months
notice
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II.

DISCHARGING CONTRACTS

A contract may also be discharged by a

subsequent agreement .
The agreement for rescission ( ) may be
either express or implied. Non-performance for a
long period may lead to an inference of
abandonment.

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II.
CASE

DISCHARGING CONTRACTS
Pearl Mill Co. v Ivy Tannery Co.
[1919] 1 K.B. 78

In September 1913, X agreed to sell to Y fifty dozen

skins delivery as required. By September 1914, Y
had from time to time requested delivery of twenty
dozen which had been duly delivered, but no more
deliveries were asked for until July 1917.
Held, an inordinate delay having taken place, the
parties must be taken to have abandoned the
contract.
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II.
2.2.1

DISCHARGING CONTRACTS
Accord and Satisfaction

Accord and satisfaction occurs when after a contract is

concluded a party obtains the release from his/her
contractual obligation by giving or promising a
consideration other than that which the other party is
bound to accept under the contract. The agreement is
known as accord and the consideration as satisfaction.
Accord without satisfaction is no discharge of a contract
or of a right of action arising from the contract. When the
other side has already completely performed his/her
promises, fresh consideration or a deed is required.
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DISCHARGING CONTRACTS

2.2.2
Variation
The parties may seek to vary, rather than discharge, their
original contract.
CASE
Electronic Industries Ltd. v

David Jones Ltd.

[1954] 91 CLR 288

The plaintiff undertook to demonstrate television equipment
in the defendants store for a stated period, but was
subsequently asked to postpone demonstrations when a
strike broke out.
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II.

DISCHARGING CONTRACTS

The plaintiff agreed to a postponement of the

demonstrations until another date could be fixed.
Subsequently, the plaintiff wrote to the defendant
suggesting that the demonstration should be staged in
August. The defendant did not reply to that letter until
mid-July, when it intimated that it did not agree to the
proposal as trade in its retail store was still adversely
affected by the industrial disturbance. The plaintiff did
not make any attempt to begin the installation of the
equipment in mid-July, but awaited further information
as to the time or times which would prove suitable to the
defendant.
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II.

DISCHARGING CONTRACTS

Further attempts by the plaintiff to fix a mutually

convenient date failed, and the defendant then
informed the plaintiff that it no longer desired to have
the television demonstration staged in its store. The
plaintiff thereupon sued the defendant for breach of
the contract.

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II.

DISCHARGING CONTRACTS

The High Court of Australia held that, in the situation,

both parties remained bound by the contract. In delivering
the written judgment, the court said, among other things:
Of course if the parties did intend to keep the original
agreement no longer on foot, to rescind it, that is the end
of the matter. But it is certain that they did not intend to
rescind the original contract and that they never did so.
The plaintiff always meant to perform it and hold the
defendant bound to it. Never for a moment did the plaintiff
mean to exonerate the defendant from the contract.
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II.

DISCHARGING CONTRACTS

All it meant to do, and all it did do, was to accede to the
defendants request for a postponement in order to oblige
the defendant and consult the interests of the defendant.
The truth was that the plaintiff expressed its willingness to
vary the contract by substituting a new agreed date, and
awaited an answer to its proposal, forbearing in the
meantime in pursuance of the defendants request to
tender actual performance. In the situation which resulted
both parties remained bound by the contract. The fact that
there was no longer a fixed date for performance brought
into application the principles which impose on parties, in
all cases where the performance of their obligations
require co-operative acts, the duty of complying with the
reasonable requests for performance made by the other.
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II.

DISCHARGING CONTRACTS

In Mackay v Dick (1881) 6 App Cas 251, Lord

Blackburn says: I think I may safely say, as a general
rule, that where in a written contract it appears that
both parties have agreed that something shall be
done, which cannot effectually be done unless both
concur in doing it, the construction of the contract is
that each agrees to do all that is necessary to be done
on his part for the carrying out of that thing, though
there may be no express words to that effect.
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II.

DISCHARGING CONTRACTS

2.3 Discharge by Frustration ( )

Unforeseen events may occur which make the
contract impossible to perform, while other events
may simply make it more expensive or more
difficult to perform. Where the parties foresee the
difficulties, the contract can contain a variation
clause or a force majeure clause.
The courts will hold that a contract is frustrated
only when an event which was unforeseen by the
parties, and for which the contract makes no
provision, has occurred.
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II.

DISCHARGING CONTRACTS

- neither of the parties is at fault

- circumstances are radically different now
CASE
Wong Lai-ying and Ors v
Chinachem Investment Co., Ltd.

[1979] HKLR 1
W entered into a contract with CIC to purchase a flat in a
development known as University Heights to be
constructed on land owned by CIC. A term of the contract
provided that in the event of a dispute or unforeseen
circumstances CIC could rescind, i.e., cancel, the contract.
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II.

DISCHARGING CONTRACTS

During the construction a major landslip occurred above Po

Shan Road, causing all the building works of University
Heights to be destroyed. Work was eventually resumed and
the flat was completed two and a half years later than
originally agreed. CIC Ltd. then refused to complete the sale
to W, claiming that the contract was frustrated. W claimed
an order for specific performance of the contract of sale.
The Privy Council was asked to decide whether provision
was made for an event causing the circumstances of
performance to be radically different from that undertaken
by the contract. Clause 22 of the agreement provided as
follows:
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DISCHARGING CONTRACTS

It is further agreed that notwithstanding anything herein

contained should any dispute arise between the parties
touching or concerning this Agreement or should any
foreseen circumstance beyond the Vendors control arise
whereby the Vendor becomes unable to sell the said
undivided shares and Apartment to the Purchaser as
hereinbefore provided, the Vendor shall be at liberty to
rescind this Agreement forthwith and to refund to the
Purchaser all installments of purchase price paid by the
Purchaser hereunder without interest or compensation and
upon such rescission and upon
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DISCHARGING CONTRACTS

repayment of the instalments of purchase price this

Agreement shall become null and void as if the same had
not been entered into and neither party hereto shall have
any claim against the other in respect thereof.
It was held that the general words of cl 22 could not be
construed as making provision for the possibility of the
landslip, which was an unforeseen contingency having the
consequences of fundamentally changing the character
and duration of the performance of the contract, and that
the inclusion of such a clause is not inconsistent with the
operation of the doctrine of frustration and does not show
an intention that that doctrine shall not apply.
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II.

DISCHARGING CONTRACTS

The landslip was a major interruption which

fundamentally changed the character and duration of
the performance of the contract. The contract was
frustrated.

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II.

DISCHARGING CONTRACTS

CASE

Davis Contractors Ltd. v

Fareham Urban District Council
[1956] AC 696
The appellants agreed to build 78 houses for a local
authority in eight months for a fixed sum. Because of
a shortage of skilled labour and building materials,
the work took 22 months to complete, and the
appellants incurred additional expenses. They
claimed that the contract was frustrated, and they
also claimed to be entitled on a quantum meruit to a
sum in excess of the contract price.
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DISCHARGING CONTRACTS

The House of Lords held that the contract was not

frustrated. The fact that, without the fault of either
party, there had been an unexpected turn of events
which rendered the contract more onerous than
had been contemplated was not a ground for
relieving the appellants of the obligation which
they had undertaken and allowing them to recover
on the basis of a quantum meruit ( ) .
There must be such a change in the significance of
the obligation that that thing undertaken would, if
performed, be a different thing from that
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contracted for.

II.

DISCHARGING CONTRACTS

Essential factors of Contract Frustration :

(a) There must be some outside event or extraneous
change of situation, not foreseen or provided for, making
performance of contract impossible or radically different.
(b) The outside event or extraneous change must have
occurred without the fault of either party to the contract.
frustrated contract is terminated from the date of the
courts decision.
relieved of all future obligations yet remain liable for
performance already rendered or for money which has
already become due.
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DISCHARGING CONTRACTS

Law Amendment and Reform (Consolidation)

Ordinance, enacted in 1986, which provides:
- Money paid before the frustrating event is
recoverable.
- Money payable before the frustrating event ceases
to be payable.
- Expenses incurred in performance of the contract
prior to the frustrating event may be recovered if a
sum is paid or is payable before the frustrating
event.
- If a valuable benefit is received under the contract
prior to the frustrating event, the court may order
payment for that benefit.
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DISCHARGING CONTRACTS

2.4 Discharge by Breach

Breach of Contract - if one of the parties fails to perform
his contractual promises or deviates from the terms of the
contract
Condition broken - the innocent party may treat
himself/herself as discharged from the contract (to
repudiate the contract) and to recover damages for loss of
the contract, or to keep the contract valid and recover
damages for the particular breach.
Warranty broken - the innocent party cannot obtain
damages for loss of the contract but recover damages for
the particular breach.
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DISCHARGING CONTRACTS

Alternatively, the courts may consider the

consequences of the breach
Anticipatory breach prior to the date of performance
Choice of the innocent party:
to accept the breach, treat the contract as discharged,
and sue immediately for breach of contract, or
- to wait for the time of performance to see whether
the other party does in fact perform.
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DISCHARGING CONTRACTS

CASE

White & Carter (Councils) Ltd. v McGregor

[1961] HL
W & C, suppliers of litter bins, contracted with M to
advertise Ms garage on a number of the litter bins for
a period of three years. On the same day, M decided to
cancel the contract, but W & C refused to accept the
cancellation and proceeded to display the
advertisements. M refused to pay for the
advertisements.
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DISCHARGING CONTRACTS

It was held that W & C were not bound to accept

Ms breach as repudiation. The innocent party
may accept the repudiation and sue for damages,
or he may refuse to accept it and then the contract
remains in full effect. W & C were entitled to the
contract price.

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