Parties to a Contract Are Bound by an Obligation

According to ‘The Commercial Law of Malaysia’ written by Beaxrix Vohrah and Wu Min Aun, parties to a contract are bound by an obligation and they must either perform, or offer to perform, their respective promises, unless the performance is dispensed with or excused under the law. When the parties have carried out exactly what they have to perform, then the contract is completely discharge. However, if there is only one party that performed his part of bargain, then he is the only party will be discharged.

As general rule, according to Section 40 of the Contract Act 1950, if the party refused to perform, or disabled himself from performing his promises, then the contract will come to the end, unless he has signified, by word or conduct, his acquiescence in its continuance.

Under the discharge by performance, the time and place for the performance will be the important items that will affect whether the contract will be rescinded. Section 56 of the Contract Act 1950 lays down the law relating to the effects of time to the contract. Under Section 56(1), when a party to a contract fails to perform his promises at or before the specified time, the contract becomes voidable at the option of promise, if the time is essence of the contract. In the case of ‘Sim Chio Huat v Wong Ted Fui’, the Federal Court give the right to the respondent to choose either action when the housing developer failed to deliver his deliver the house in according with to the time they had agreed. In facts on the case, the respondent had decided to continue the contract regarding of the breaching of the contract and conduct it by allowing the delivery dates to pass. But the respondent required extra work to be done by the housing developer. So, as the respondent wish to continue the contract, the time is no longer important.

However, if the mere conclusion of a clause in a contract fixing a time for performance and nothing more does not per se mean that time is of the essence. It means that the contract only mentioned the time of performance but does not mention on the time is of essence. Therefore, the delay on the performance will not bring the contract to the end. In the case of ‘Ganam d/o Rajamany v Somoo s/o Sinnah’, the Federeal Court held that since there was no any provision expressed that time to be of the essence in the contract, so the innocent party could not terminate the contract for the failure of the other party to pay the purchase price on the specified date.

While the consequence on exceeding of the stipulated time if the time is not the essence of contract is that the innocent party is entitled to claim compensation for any loss. This is according to the Section 56(2) which stated that, if the time is not essence of the contract, the contract does not become voidable, but the promise entitled to compensation from promisor for any loss occasioned to him. In the case of ‘Loiunder v Leis’, the High Court held that when there is a mere delay in carrying out an obligation beyond the specified date, it is said to be a breach to the contract, but it did not come to the termination of the contract. The innocent party is entitled to claim on the damages that he/she suffered.

In the other hand, under Section 56(3), if the innocent party accepts the performance after the stipulated date, he is not entitled to claim the compensation for any loss from the non-performance at the time agreed, unless he gives notice to the promisor that he has the intention to claim the compensation. In the case of ‘Eng Mee Yong & ORS v Letchumanan’, the caveator failed to pay the purchase price within the specified date and thus had breach a condition of sales agreement. In this situation, caveatees can elect to terminate the contract. But if the caveatees choose to continue the contract after the stipulate time, they cannot claim for the damages from the caveator later on, unless at the time when they accepted the delayed of the performance, they give notice to the caveator that they have the intention to claim for the damages.

Discharge by frustration

Under discharge by frustration, there have two categories of impossibility of performance that are impossibility of performance at the time contract and impossibility after it has been made. According to Section 57(1) of the Contract Act, an agreement to do an act impossible in itself is void. As the illustration (a) in the Contract Act, A agrees with B to discover treasure by magic. The agreement is void as it is impossible in itself.

From Section 57(3), where one person has promised to do something which he knew, or, with reasonable diligence, might have known, and which the promise did not known, to be impossible or unlawful, the promisor must make compensation to the promise for any loss which the promise sustains through the non-performance of the promise. This can be said that either only one or both the parties know there will be existence of impossibility but if only one of the party knew it or by reasonable diligence known and the promisee did not know that it will be impossible or to be unlawful, the promisor need to make compensation to promisee on the losses incurred regard to this. As example in Contract Act, A contract to marry B, but A is already married to C and it is prohibited by law for A to practice polygamy. Therefore, A need to make compensation to B for the loss for the non-perform on his promise.

Besides, according to Section 57(2), a contract to do an act which, after the contract is made, becomes impossible, or by reason of some event which the promisor could not prevent, unlawful, becomes void when the act becomes impossible or unlawful. The contracts have become impossible to perform subsequent to their making. As illustrate in illustration (d) in Contract Act, in contract, A agree to receive cargo for B at a foreign country port. After sometimes, A’s Government declares war against the country as stated in the contract which the cargo will be received. The contract has becomes void when war is declared. A can’t take in cargo for B at a foreign port due to the war and the contract becomes void.

Impossibility of performance or frustration terminates the contract automatically and the contract becomes void. According to Section 66, when an agreement is discovered to be void, or when a contract becomes void, any person who has received any advantage under the agreement or contract is bound to restore it, or to make compensation for it, to the person from whom received it. From illustration (d) under section 66, A have been enter in the contract to sing for B for RM1,000 at a concert and the RM 1,000 was paid in advance for A. At the time of concert, A is too ill to sing therefore, A need to make the refund of the RM1,000 paid in advance but not the amount for the loss of profit that B might have earned if A is able to sing.

Discharge by breach

From Section 40 in Contract Act, when a party to a contract has refused to perform, or disabled himself from performing, his promise in its entirety, the promise may put an end to the contract unless he has signified, by words or conduct, his acquiescence in its continuance. When the promisor fails to perform his obligations, it has come to breach of the contract. The parties that not in breach is entitled to take appropriate action towards the contract that may include repudiation. As the promisor refuse to perform or disable to perform can put the contract to an end.

The party that not in breach has their own right to either choose to continue with the contract claims the damages incurred due to the breach or repudiates the contract. The continuation of the contract can be made by either using words or conduct. From the case ‘Ching Yik Development Sdn Bhd v Setapak Heights Development Sdn Bhd’, the court held that if the term that is fundamental to the contract is breached, the innocent party can entitled to terminate the contract due to the non-performance. However, if the term is not fundamental but only minor or subsidiary, the innocent party may just recover the damages arise due to the non-performance.

In case of ‘Ban Hong Joo Mine Ltd v Chen & Yap Ltd’, the Federal Court ruled that the deliberate refusal of the appellants to make fortnightly payments for work already done and their order to the respondents to stop work left the latter with no option but to treat the contract as having been repudiated, and to sue for payment for the work which had been done. While in the case ‘Sim Chio Huat v Wong Ted Fui’, the Federal Court recognized the right of the respondent to adopt either course of action when a housing developer failed to deliver his deliver the house as the stated time in the contract. But on the facts on the case, it is decided that the respondent allowed the delivery dates to pass and had choose to treat the contract as subsisting despite the breach, by acquiescing in the work being carried on and ordering the housing developer to finish the undone part soon. As long as the term breaches just a minor, the innocent party can choose not to terminate the contract but he can recover damages for the non-performance.

According to Section 74 (1), when a contract has been broken, the party who suffers by the breach is entitled to receive, from the party who has broken the contract, compensation for any loss or damage caused to him thereby, which naturally arose in the usual course of things from the breach, or which the parties knew, when they made the contract, to be likely to result from the breach of it. As in illustration, A agrees to buy ship from B at the price of RM 60,000, but afterward he breaks his promise. In this case, A needs to pay compensation to B for the breach of the contract for the contract price or the excess of the price that B can obtain for the ship at the moment of the breach of the promise.

As Section 74 (2), such compensation is not to be given for any remote and indirect loss or damage sustained by reason of the breach. From what discussed in illustration (n), A did not pay money to B on the specific day as stated in the contract. As the consequences, B have been totally ruined due to unable to pay his debt as he did not receive the money from A on that particular day. In this case, A is just entitled to pay B the principal sum that he contracted to pay with the interest amounted to the date of payment. A is not liable to pay any other compensation except those stated.

Section 74 (3), when an obligation resembling those created by contract has been incurred and has not been discharged, any person injured by the failure to discharge its is entitled to receive the same compensation from the party in default as if the person had contracted to discharge it and had broken his contract. This can be showed clearly at illustration (r), a ship owner, A, contract to convey B from Kelang to Sydney in his ship that will be sailing on 1st January. B pay A the one-half of his passage money as the deposit to A. On 1st January, A’s ship did not sail and B is being retained in Kelang due to that. This made B need to incur some expenses to proceed to Sydney with another vessel that made him late in arriving Sydney and losses some amount of money. In here, A is liable to pay compensation to B on the deposit paid with interest, the expense that incur for another vessel and those detention cost in Kelang. As A breach the contract, he is entitled to pay B any inconvenience cost that arising due to the breach of contract.