The entire obligation rule
The starting-point is that a party who fails to complete performance of an entire obligation cannot recover either the contract price or a restitutionary sum for the benefit conferred. The classic illustration is Cutter v Powell. The rule rests on the premise that parties have expressly or impliedly agreed that full performance is a condition precedent to payment. It promotes certainty and allocates the risk of non-completion to the performing party. A party who breaks an entire obligation commits a repudiatory breach, entitling the other party to terminate and refuse payment.
Whether a contract contains an entire obligation is a question of construction. Courts consider:
- express language (e.g. 'payment on completion');
- the structure of the bargain (lump-sum versus stage payments);
- industry practice;
- the nature of the work (building contracts are traditionally entire; service contracts for long periods are often divisible).
In modern commercial construction contracts, the entire obligation rule is typically displaced by interim certificates and retention clauses.
Substantial performance
The doctrine of substantial performance, articulated in Hoenig v Isaacs [1952] 2 All ER 176, permits a contractor who has completed the work save for minor defects to recover the contract price less the cost of remedying those defects. The test is whether the defects go to the substance of the contract or are merely incidental. In Hoenig, a decorator supplied and fitted furniture for £750; the finished work had defects costing £55 to remedy. The Court of Appeal held that the claimant had substantially performed and could recover £695.
By contrast, in Bolton v Mahadeva [1972] 1 WLR 1009, a central-heating system installed for £560 cost £174 to remedy and did not heat the house adequately. The Court of Appeal held that there had been no substantial performance: the defects were not trifling, and the contractor recovered nothing. The doctrine does not apply where the innocent party has no opportunity to reject—such as where work is done on the innocent party's land—because in such cases a restitutionary claim may lie for the value of the benefit conferred (Sumpter v Hedges [1898] 1 QB 673).
The doctrine is controversial. It mitigates the rigour of the entire obligation rule but blurs the line between breach of condition and breach of warranty. It may encourage shoddy work. In practice, commercial parties draft around it by specifying retention sums and defect-liability periods.
Divisible and severable obligations
A contract may be divisible (or severable), meaning that performance and payment are apportioned over defined stages. A contract to deliver goods in instalments, each with its own price, is divisible: the buyer must pay for conforming instalments even if a later instalment is defective, unless the breach goes to the whole contract (Mersey Steel & Iron Co v Naylor Benzon & Co (1884) 9 App Cas 434). Employment contracts paid by the week or month are typically divisible: the employee who works for part of the period can claim wages for that part (Apportionment Act 1870, s 2).
Tender of performance
A party who tenders proper performance and is prevented from completing by the other party's refusal or default is treated as having performed. Tender must be unconditional and made at the proper time, place, and manner. If the innocent party refuses proper tender, they cannot later sue for non-performance and may themselves be in breach. Tender of payment does not discharge a debt, but it stops interest running and may ground a defence of tender if the creditor later sues.
Time of performance
At common law, time is not of the essence unless the contract says so or the nature of the subject matter (e.g. perishable goods, market fluctuations) requires it. If time is not of the essence, late performance is a breach sounding in damages but not repudiatory. If time is of the essence, any delay entitles the innocent party to terminate.
Even where time is not initially of the essence, the innocent party may make it so by giving reasonable notice requiring performance by a specified date (Charles Rickards Ltd v Oppenheim [1950] 1 KB 616). What is reasonable depends on the circumstances.
Breach of condition, warranty, and innominate term
Not every breach justifies discharge. The classification of terms—into conditions, warranties, and innominate (intermediate) terms—determines the innocent party's remedies (considered in week 4 and revisited here).
- Condition: a term so important that any breach entitles the innocent party to terminate and claim damages (Poussard v Spiers & Pond (1876) 1 QBD 410).
- Warranty: a minor term; breach sounds only in damages (Bettini v Gye (1876) 1 QBD 183).
- Innominate (intermediate) term: the remedy depends on the gravity of the breach. If the breach deprives the innocent party of substantially the whole benefit of the contract, it is repudiatory; otherwise damages only (Hong Kong Fir Shipping Co Ltd v Kawasaki Kisen Kaisha Ltd [1962] 2 QB 26).
In sale-of-goods contracts, sections 12–15 of the Sale of Goods Act 1979 classify certain terms (title, description, quality, sample) as conditions, though the right to reject for breach may be lost in non-consumer cases if the breach is so slight that rejection would be unreasonable (s 15A).
Anticipatory breach
Anticipatory breach occurs when, before the time fixed for performance, one party by words or conduct evinces an intention not to perform. The innocent party may either:
- Accept the repudiation: treat the contract as discharged immediately, cease performance, and sue for damages at once (Hochster v De la Tour).
- Affirm the contract: insist on performance, keep the contract alive, and sue only if and when actual breach occurs.
Affirmation carries risk: supervening events (e.g. frustration) may discharge both parties. In Avery v Bowden (1855) 5 E&B 714, the claimant affirmed an anticipatory breach; before the performance date, the Crimean War broke out, frustrating the contract. The claimant recovered nothing.
The controversial decision in White & Carter (Councils) Ltd v McGregor [1962] AC 413 held that an innocent party who affirms may perform the contract without the defendant's cooperation and claim the price, subject to Lord Reid's limitation that the claimant must have a legitimate interest in performing rather than claiming damages. The precise scope of this limitation remains debated.