08 Dec Messy Contracts
2020 has had no shortage of catastrophic and shocking news. For football fanatics, one of the biggest stories of the year has been Lionel Messi’s announcement that he was no longer happy with the direction of his club, Barcelona, and wanted to end his contract. This was despite there being an entire year remaining before the contract’s termination date in 2021. This led to a much anticipated showdown between the G.O.A.T. and his beloved club as to whether he could be discharged of his obligations under the contractual agreement. Although ultimately settled, with Messi deciding to fulfil his obligations and stay at the club for the remainder of his contract, the dispute raised a number of issues. One issue was whether the player could have unilaterally ended his contract with the club, without liability, before the actual termination date in 2021.
This article will explore the ways in which contracts may be brought to an end and some of the key commercial considerations for parties who are contemplating terminating their contracts.
Discharge of a Contract
There are four (4) main ways in which contracts may be discharged or brought to an end. These are known as discharge by:
- Operation of law (e.g. frustration); or
Discharge by Performance
A contract will come to an end when parties fulfil their obligations in accordance with the terms of the contract. In some cases, the parties may be subject to ongoing obligations and in these cases, it is likely that the contract will include a termination date (end date). In Messi’s case, the contract is for a fixed term of four years, ending in 2021. Therefore, providing he continues to fulfil his obligations for the club until the termination date (which he has indicated he will do) there will be discharge by performance.
Discharge by Agreement
A contract may come to an end where parties agree to abandon or discharge their obligations under the contract. For the discharge to be effective, it must be done by either a release or by some form of mutual consideration.
Where one party has fully performed his obligations under the contract (‘the innocent party’) but the other has not, a release will generally be required. No particular form of words is necessary to constitute a valid release but it must clearly show the intention to renounce a claim or discharge the other party from performing his obligations.
Where neither party has performed the whole of his obligations under the contract, consideration can usually be found in each party’s abandonment of his right to performance or his right to claim potential damages. The contract may therefore be terminated by express or implied mutual agreement.
In Messi’s case, had Barcelona permitted him (either expressly or impliedly) to leave the club at the end of the season in 2020, this would have signalled a discharge by mutual agreement. However, there was no mutual agreement between the player and club since the club refused to allow Messi to leave before the end of his contract in 2021.
Discharge by Operation of Law
A contract may be discharged by the doctrine of frustration. This is where something occurs which renders it physically or commercially impossible to fulfil the contract or where the obligations which the parties contracted to perform, become radically different from that which was initially agreed. If frustration is established, the parties will be discharged from further obligations under the contract. Accordingly, the threshold for establishing the doctrine is quite high and it cannot be relied on to discharge the parties from a bad bargain.
The Covid-19 pandemic undoubtedly affected the timeline of the 2020 football season. This in turn rendered complications in the performance of contractual obligations as evidenced in the Messi versus Barcelona saga. While the pandemic made it difficult for footballers like Messi to perform their obligations under the contract, it did not render performance of the contract impossible. As such, it is unlikely that Messi could have relied on the doctrine of frustration.
In any event, it would have been important to review the terms of Messi’s contract as there may have included an express clause addressing catastrophic events (such as a force majeure clause) which would render the doctrine of frustration inapplicable.
Discharge by Breach
A party to a contract may be entitled to treat himself as discharged from performing his obligations under the contract if the other party acts in breach. This is known as discharge by breach. A breach occurs when a party without lawful excuse fails or refuses to perform his obligations under the contract (e.g. not paying the contract sum).
There are different types of breaches which carry different remedies. Notably, not all breaches will entitle the innocent party to terminate the contract. Generally, if the breach is a major one (such as a breach of a condition), this entitles the innocent party to terminate the contract and claim damages. However, if the breach is a minor one (such as a breach of a warranty) the innocent party would only be entitled to damages but would not be able to terminate the contract.
In some cases, there may be terms which can be either conditions or warranties. These are known as innominate terms and in determining whether termination is justified, it is important to look at the effect of the breach. If the breach goes to the ‘root’ of the contract, this will generally justify termination but if it does not, the innocent party will not be entitled to terminate but can still claim damages.
Key Considerations When Deciding Whether to Terminate the Contract
Whether you are (i) unhappy with your contractual agreement, (ii) simply not in a position to fulfil your obligations (for instance, because of the effects of the Covid-19 pandemic), or (iii) the other party has committed a breach, and you wish to terminate the contract, the following are some key considerations to take into account before making such an important decision:
- Examine the terms of the contract and consider the following:
- whether there are any clauses regarding termination of the contract (such as early termination, termination upon the performance of specified obligations, termination after a lapse of time or termination as a result of a breach).
- whether there are any specific clauses relating to a breach of contract (such as clauses specifying the outcome should parties fail to perform their obligations). If the contract includes a sum of damages for failure to perform obligations thereunder and this represents a genuine calculation, it will be enforced. However, if the amount is not genuine but is unreasonable, it may be viewed as a penalty clause and will not be enforced.
- what type of term (whether a condition, warranty or innominate term) has been breached by the other party, if any, as this will govern whether the contract can in fact be terminated as a result of the breach.
- whether the contract can be terminated by operation of law such as the doctrine of frustration and whether any frustrating events have occurred. As mentioned, the threshold for establishing this is high and a mere difficulty in performing the contract will not be deemed a frustrating event.
- what costs may result from terminating the contract (such as damages or legal costs should the other party sue for breach on the basis that the obligations under the contract have not been performed or the contract is prematurely terminated).
- Engage in dialogue with the other party with the aim of settling any disputes amicably. Discussions and negotiations can be helpful to determine whether the possibility exists to end the contract by mutual agreement or to vary the terms to avoid any potential breaches or the escalation of any disputes (e.g. deferring payment of the contract sum).
A party wishing to terminate his contract should carefully consider the risks of doing so. In Messi’s case, the player decided not to end his contract with the club after having considered the time and uncertainties of litigation and the risk that he may not have been able to play football with any other club while litigation was pending. Messi’s dilemma depicts that the risks of terminating the contract before full performance can outweigh any benefits that may come with early termination. As such, sometimes the most secure and workable solution is to honour the contract instead of refusing to perform the obligations and prematurely terminating it.
Disclaimer: This Document Provides General Guidance Only And Nothing In This Document Constitutes Legal Advice. Should You Require Specific Assistance, Please Contact Your Attorney-At-Law.
This Article was authored by Jeanelle Pran, Associate at M. Hamel-Smith & Co. She can be reached at firstname.lastname@example.org.