Discharge of contract

The word ‘discharge’ in law means the release from an obligation, debt or liability.

So, ‘discharge of a contract’ means the termination of a contractual obligation or liability.

When a contract is discharged, it comes to an end and imposes no further legal responsibilities on the parties.

The original parties are therefore no longer bound by the contract

DISCHARGE

A contract may be discharged in one of the following ways:

i) Performance; ii)Agreement; iii) Breach; iv) Impossibility (or frustration)  

DISCHARGE

A contract is discharged when both parties carry out their promises.

If Sunshine Housepainters Sdn Bhd agrees to paint Mr. Mohan’s house for RM1,000, the contract is performed and discharged when the house is painted according to the specifications mentioned in the contract and full payment has been made.

Section 38(1) of the Contracts Act states that parties to a contract must either perform or offer to perform their respective promises, unless such performance has been dispensed with by any law.

The general rule is that a party must do everything promised in the contract. Part performance is no performance.

Performance

The exceptions are: i) Installment contracts in which A becomes obliged to pay B

even though B has only partly performed his part of the contract; A normally has to pay a proportionate amount of the price at that stage.

ii) A may have ‘accepted’ partial performance by B in circumstances in which A had a free choice; then A will be required to pay on a quantum meruit (reasonable sum) basis.

iii) Some action on A’s part has prevented B from completing the contract; then B will be entitled to a quantum meruit payment.

Section 51 states that the performance of any promise may be made in any manner, or at any time, which the promisee prescribes or sanctions.

Cont…

As a general rule, failure to perform or pay on time is only a breach of ‘warranty’ and will not bring an end to the contract.

However, in those cases where the time of performance is crucial, then it is a ‘condition’ of the contract. The parties can always make the time of performance a condition of the contract by stipulating that time shall be of the essence of the contract.

Under section 56(1), where time is of the essence, failure to perform within the fixed time would render the contract voidable.

  Where time is not of the essence, then performance must be

within a reasonable time of the date fixed, and payment must be ‘within a reasonable time’ of the completion of the contract.

Cont…

The parties, of course, can always agree to terminate a contract before it has been fully performed.

If the contract has not even started, it is known as an executory contract, and it can be terminated simply by a new agreement of the parties to waive their respective rights under the contract.

This new agreement is in itself a binding contract (the consideration from each party is the giving up of the right to demand the other party to perform) and cancels out the original contract.

I ) AGREEMENT

If one party has performed or partly performed his part of the contract, then before this contract is discharged, the other party who has done nothing must:

i) provide some new consideration to compensate the performing party; or

ii) receive a discharge under seal from the performing party.

The parties may also agree beforehand that the occurrence of some specific event would discharge the contract. For example, a charter party contract for the hire of a ship may contain a term that a dock strike will discharge the contract.

 

Cont…

A contract is frustrated if an even occurs between the contract being agreed and it being performed, which is the fault of neither party, but which renders the contract legally or physically incapable of performance in its originally intended form.

Section 57(2) states that: 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 contract, when frustrated, becomes void. Both parties are

discharged from any further obligations under the contract without any liability incurred towards the other party.

II) FRUSTRATION

H.A. Berney v Tronoh Mines Ltd [1949]

On the invasion of Malaya by the Japanese forces during the Second World War, the European staff of the defendant company was evacuated from Tronoh, Tanjong Tuallang and other places, but the plaintiff elected to remain at Tanjong Tuallang. Thereafter, the plaintiff was not paid any wages. After the War, the plaintiff sued the defendant for breach of contract of service. The defendant contended that consequent on the Japanese occupation of Perak, the contract of employment between them and the plaintiff was discharged by frustration.

The court held that the invasion of Malaya by the Japanese frustrated the performance of the contract and there was no breach of contract by the defendant.

RELATED CASES

Re Shipton, Anderson & Co (1915) A contract for delivery of wheat was made, but before

delivery took place, An Act of Parliament was passed requisitioning all wheat for the government.

The court held that the contract was frustrated.

Taylor v Caldwell (1863) The defendant agreed to let the plaintiff to have the use

of the Old Surrey music hall for a concert. Before the day of performance, the hall was destroyed by fire.

The court held that the contract was frustrated.

RELATED CASES

Robinson v Davison (1871) A piano player was to perform at a concert. She fell ill and could not play on

the appointed date. The court held that as it was not her fault that she was unable to perform, the

contract was frustrated. Krell v Henry (1903) The defendant hired a room which overlook the route of the procession of King

Edward VII’s coronation. The King was ill and the coronation was cancelled. The court held that the contract was frustrated because the procession was the

basis of the contract.  Herne Bay Steamboat Co v Hutton (1903) After the coronation, the King was to travel to Spithead to review the fleet,

which was assembled there. Hutton hired a boat to follow the royal barge, but because the King’s illness prevented the royal review, Hutton did not use the boat.The court held that the contract was not frustrated, because the purpose of the contract was to review the fleet, and as it was still assembled at Spithead, the contract was possible. Hutton was liable to pay damages.

 

RELATED CASES

(i) Contract becomes void at the date of frustration.

(ii) Person who received advantage is bound to restore or compensate.

(iii) Both parties retreat to their original position.  

 Consequence of a Frustration

A breach of contract occurs when: i) one party fails to perform a particular undertaking by the

appointed day; or ii) one party does not perform as agreed (e.g. supplying sub-

standard goods); or iii) one party will not perform as promised.

The other party may then sue for breach of contract. Section 40 provides that: When a party to a contract has refused to perform, or

disabled himself from performing, his promise in its entirety, the promisee may put an end to the contract, unless he has signified, by words or conduct, his acquiescence in its continuance.

III) BREACH

If one party indicates well in advance of the time due for performance that he has no intention of performing his obligations under the contract, the breach is known as an ‘anticipatory breach’.

The other party need not wait until the agreed time of performance, but can start a court action immediately. For example, if in June A contract to start work in September as an administrative officer with B Company, and B Company in July informs A that it will not employ A, A can sue for breach of contract in July; there is no need to wait until September before starting a court action. Of course, A can also wait until September and then sue.

   

Cont…

i) DAMAGES

ii)SPECEFIC PERFORMANCE

iii) INJUNCTIONS

REMEDIES FOR BREACH OF CONTRACT

Under the Limitation Act, no action based upon a breach of contract may normally be brought after six years have expired since the date upon which the cause of action arose; for contracts under seal, the time limit is twelve years.

Even though the limitation period, as it is called, may have expired (the action is said to be time-barred), the cause of action, where it involves a debt, may be revived by either an acknowledgement in writing, signed by the debtor to the creditor, or by a part-payment clearly referable to the original obligation.

If the cause of action involves fraud, or has been concealed by fraud, or is based on a mistake, the period will not run until the plaintiff ought reasonably to have discovered the truth.

TIME LIMITS

A breach of contract entitles the injured party to damages to compensate him for his loss. So, if there is no loss, there will be no damages, other than nominal damages to reflect the fact that a contract has been broken.

The purpose of damages is not to penalize or punish the defaulting party. The general aim of damages is to put the injured party back where he started, in so far as this is possible by financial means.

I) DAMAGES

A clause in a contract which provides that a party, should he defaults, shall pay a higher then usual sum of money as compensation to the other party, is called a penalty clause.

However, if the compensation specified is a genuine pre-

estimate of the probable loss which would be suffered following a breach, the clause is called a liquidated damages clause.

Under English law, a penalty clause would be void, but a liquidated damages clause would be valid. However, in Malaysia, there is no distinction between liquidated damages and penalties as understood under English law: Selva Kumar a/l Murugiah v Thiagarajah a/l Retnasamy [1995], FC.

   

Cont…

Under section 75 of the Contracts Act, a plaintiff is only allowed to recover a reasonable sum for breach of contract.

If a sum is named in the contract to be paid in case of such breach, then the amount of damages recoverable cannot exceed that sum.

The plaintiff is still required to prove the actual damage he has suffered and cannot just simply recover the named sum (regardless of whether it is a penalty or liquidated damages).

Cont…

Section 74(2) states that: Such compensation is not to be given for any remote and indirect loss

or damage sustained by reason of the breach.

Before a person may claim any damages, he must be able to prove that the loss which he suffered was the direct consequence of the breach by the other party, and was not too remote from it.

This usually amounts to a question of how foreseeable a particular form of loss was, given the facts known to the defendant at the time.

Under section 74 of the Contracts Act, an injured party may recover any loss or damage for any breach which:

naturally arose in the usual course of things; or which the party knew, when they made the contract to be likely to

result from the breach of the contract.

REMOTENESS OF DAMAGES

Hadley v Baxendale (1854) Hadley, a miller, delivered a broken crank-shaft to Baxendale, a carrier, for transport to

a firm of engineers who were to make a new one on the pattern of the broken one. The mill machinery could not be operated until the new shaft was delivered, but Baxendale was not informed of this exceptional circumstance. Delayed delivery for an unreasonable time, with the consequence that the mill was idle for a longer period than it would have been had the shaft been delivered promptly. Hadley sued in respect of loss of profits during the period of additional delay.

The court held that the damage was too remote and Hadley’s claim failed.   Victoria Laundry v Newman Industries (1949) Newman Industries Ltd agreed to deliver a new boiler to Victorial Laundry Ltd by a

certain date, but failed to do so, being 22 weeks late. As a result, Victorial Laundry Ltd lost (a) normal business profits during the period of delay, and (b) profits from dyeing contracts which were offered to them during the same period.

The court held that (a) was recoverable as damages, but (b) was too remote and not recoverable because Newman Industries Ltd did not know, nor as reasonable men ought to be aware of the dyeing contracts.

 

RELATED CASES

The Illustrations to section 74 clearly indicate that a party may recover damages for:

i) other expenses incurred as a result of the breach; ii)the loss of profit arising as a result of the breach; iii) the difference between the price of goods as contracted

for and the actual price the goods were sold for as a result of the breach.

Where there is an available market for the goods, the normal measure of damages is basically the difference between the contract price and the market price at the time of the breach: Eikobina (M) Sdn Bhd v Mensa Mercantile (Far East) Pte Ltd [1994], SC.

Cont…

Once the type of loss is foreseeable by the defendant, he will be liable for the full extent of it, even if it turns out to be much greater than expected.

On the other hand, the plaintiff is expected to take reasonable steps to mitigate (i.e. minimise) his loss.

Cont..

Sometimes, the injured party is more interested in getting the contract actually performed than receiving damages for a breach. The remedy he is seeking is known as specific performance.

A typical example is the sale of a valuable and unique collector’s item, say a painting by Leonardo Da Vinci, where if the seller refuses to deliver, the buyer would want the contract to be fulfilled (i.e. specific performance) rather than getting damages.

Under section 21 of the Specific Relief Act 1950, the High Court has a discretionary power to award a decree of specific performance. Failure to obey an order of specific performance is a contempt of court and the penalty is imprisonment.

II) SPECIFIC PERFORMANCE

However, specific performance will not be awarded if:

i) the contract is an agreement for personal service (e.g. contract of employment); or

ii) it would be necessary for the court to constantly supervise the working of the contract; or

iii) it would cause undue hardship to the defendant; or iv) the terms of the contract are uncertain; or v) damages would be adequate as a remedy; or vi)there has been delay in bringing the action; or vii) there is evidence of fraud on the plaintiff’s part.    

Cont…

An interlocutory injunction is a court order prohibiting the party to whom it is addressed from doing something (e.g. breaking a contract).

The purpose is to maintain the status quo between the parties. It is a discretionary remedy and is normally only awarded if damages would be inadequate as a remedy.

Thus, it may be used to prevent a breach of contract for personal services, e.g. to stop a party under an exclusive contract from contracting with another third party.

III) INJUNCTIONS

Warner Bros. v Nelson (1037) The defendant, a film actress better known as Bette Davies,

agreed to make a film for another company although she had an exclusive contract with the plaintiffs.

The court granted the injunction to the plaintiff and restrained the defendant from carrying out the contract with the third party.

  Page One Records Ltd v Britton (1967) The manager of a pop group, the Troggs, applied for an

injunction prohibiting the group from employing anyone else as their manager.

The court held that this was in effect a request for enforcement of the original contract. The application was rejected.

Related Cases