Slide 1

Discharge by BreachDr. Nuraisyah Chua AbdullahDischarge by breach under common law;Repudiation;Fundamental breach;Discharge by breach under section 40 of the Contracts Act;Malaysian cases on repudiation and fundamental breach.

Discharge by breach under common lawUnder the common law, there are two situations which give the innocent party the right to be discharged form the contract; (a) a repudiation, and (b) a fundamental breach.RepudiationRepudiation occurs when one of the parties intimates, through words or conduct, that he has no intention to perform his obligation when the obligation falls due in future. This act can be evinced expressly through an unqualified statement to that effect as seen in Hochster v. De la Tour.

In this case, the plaintiff, a courier, was engaged on April 12, 1852, to accompany the defendant on a tour commencing on June 1, 1852. There weeks before the commencement date, the defendant wrote, to the plaintiff that he had changed his mind and that the plaintiffs services were not required anymore. The plaintiff commenced action immediately; the defendant objected on the ground that there would be no breach of contract before June 1. The Court held that the plaintiff was entitled to do so although the time for performance was not yet due. The defendant's written statement clearly amounted to a repudiation.

Repudiation can also be implied form the conduct of the defaulting party that he has no intention to carry on with the contract. In Lovelock v. Franklyn, one Dell agreed to sell a piece of land to Lovelock at a certain price, provided the price was paid over seven years. Before payment was made and well within the seven years, Dell sold the land to another person. It was held that by Dells conduct, he had impliedly repudiated his agreement with Lovelock.

In some cases, repudiation takes place before the time for performance is due, that is, before either party is entitled to demand performance by the other party. This situation is known as anticipatory breach and its basis has been explained by Cockburn CJ in Frost v. Knight as follows:The promisee has an inchoate right to the performance of the bargain, which becomes complete when the time for performance has arrived. In the meantime he has right to have the contract kept open as a subsisting and effective contract.A modern exposition on anticipatory breach is found in the judgment of Devlin J in Universal Cargo Carriers Corp v. Citati: The two forms of anticipatory breach have a common characteristic that is essential to the concept, namely, that the injured party is allowed to anticipate an inevitable breach. If a man renounce his right to perform and is held to his renunciation, the breach will be legally inevitable; If a man put it out of his power to perform, the breach will be inevitable in fact - or practically, for the law never requires absolute certainty and does not take account of bare responsibilities.

So anticipatory breach simply that a party is in breach from the moment that his actual breach becomes inevitable. Since the reason for the rule is that a party is allowed to anticipate an inevitable event and is not obliged to wait until it happens, It must follows that the breach which he anticipates is of just the same character as the breach which would actually have occurred if he had waited.

Applying the above principles, upon an anticipatory breach, the innocent party has the immediate right to commence action, and he does not need to wait until the time for performance becomes due. Repudiation, whether explicitly by words or implicitly by conduct, must be clearly established. It must be shown that the defaulting party has made his intention clear that he no longer intends to perform his contractual obligations.

In Freeth and Another v. Burr, the buyer failed to pay one installment of several deliveries of iron as he thought that he cold set-off the sum due for damages for non-delivery of an earlier installment of delivery of the iron. The court held that the mere refusal to pay for one installment in the circumstances did not warrant the defendant to treat the contract as abandoned. Keating J stated:

It is not a mere refusal or omission of one of the contracting parties to do something which he ought to do, that will justify the other in repudiating the contract; but there must be an absolute refusal to perform his part of the contract.The relevant factors were considered by the Earl of Selbourne JC in the House of Lords decision in The Mersey Steel and Iron Co. Ltd v. Naylor Benzon & Co. as follows:

you must look at the actual circumstances of the case in order to see whether the one party to the contract is relieved form its future performance by the conduct of the other; you must examine what the conduct is, so as to see whether it amounts to a renunciation, to an absolute refusal to perform the contract, such as would amount to a rescission if he had the power to rescind, and whether the other party may accept it as a reason for not performing his partFundamental breachWhen is a breach so serious or so fundamental that is not only give rise to an action for damages but also allows an innocent party to rescind the contract and treat himself as discharged?

It is accepted that there are two alternative approaches: the first approach is to look at the importance attached by the parties to the term which has been broken; the second approach is to examine the consequences of the breach of the term.

The first is based on the traditional classification of terms as either a condition or a warranty. The second is a result of the emergence of a new category of innominate or intermediate term in the case of Hong Kong Fir Shipping CO. Ltd. v. Kawasaki Kisen Kaisha Ltd.

As explained in previous lecture on Express Terms, a condition is an essential and the more important term, a breach of which gives an innocent party the right to rescind and claim damages. A warranty is a non-essential term, a subsidiary term and being the less important term, the breach of which only gives rise to an action for damages. A warranty is a non-essential term, a subsidiary term and being the less important term, the breach of which only gives rise to an action for damages.

In relation to the approach of innominate term, the right to a discharge hinges upon the gravity of the consequences flowing from the breach. If the consequences are so severe which strike at the very purpose of the contract, the breach will allow an innocent party to be discharged. If the effect of the breach is only minor and capable of being remedied, then it will only afford a remedy of damages.

Discharge by breach under section of 40 Contracts ActIn Malaysia, the right to rescind a contract flowing from a breach is governed by s40 of the Contracts Act. Under s40 of the Contracts Act, the innocent party may rescind (in the words of s40 may put an end to the contract) in two situations: first, the defaulting party refuses to perform and second, the defaulting party disables himself from performing, his promise its entirety. It is clear that the contract does not come to an end automatically, but the breach gives the innocent party an option to rescind/ terminate or to affirm/continue with the contract.

Illustration (a) and (b) give the example of A, a singer who agrees to sing at a theater two nights in every week for the next two months and breaches this contract by willfully absenting herself on the sixth night. As a result of As breach, B, the manager of the theatre may rescind/put an end to the contract (Illustration (a)) or B may affirm/give his acquiescence in the continuance of the contract and claim for damages (Illustration (b)).

It has been accepted that s40 of the Contracts Act embodies the common law position. The courts have interpreted refusal to perform and disabled to perform by reference to the common law concepts of repudiation and fundamental breach. In Hwa Chea Lin & Anor v. Malim Jaya (Melaka) Sdn. Bhd., Suriyadi CJ stated:

In Malaysia, the terminology of fundamental breach, which is a concept of the common law, though not inexact terms has become a creature of statute The relevant position is now enshrined in s40 of the [Contract] Act

Henceforth, I shall maintain the terminology of fundamental breach since I am fully satisfied that the provision of s40 is the direct descendant of the common law concept.In this case, the plaintiffs had entered into an agreement with the defendant developer for the purchase of a single-storey terrace house. The house was delivered to the plaintiffs, but the evidence showed that the building was in poor conditions which required massive remedial works and eventually had to be rebuilt. The High Court held that this amounted to a fundamental breach on the part of the defendant which entitled the plaintiff to rescind the contract as the building which was delivered was not what had been agreed upon.

The Malaysia cases have continued to refer to the concepts of repudiation and fundamental breach together with s40 of the Contract Act.

Malaysian cases on repudiation and fundamental breachIn Cho Yin Loo v. Visuvalingam Pillay as discuss previously, the High Court held that the defendants refusal to make fortnight payments to the plaintiff for building works as agreed was a breach of an essential term. In this case, the plaintiff and the defendant entered into a contract whereby the plaintiff agreed to do certain work on the land of the defendant by providing the labourers (in this case, 30 coolies) and the defendant should pay fortnight to the plaintiff 70% of the value of the work done.

In considering when a party has refused to perform his promise in its entirety, Elphinstone CJ was of the view that only a breach of an essential part of the contract would entitle the other party to repudiate the contract:

the object of the fortnightly payments must have been to provide the plaintiff with working capital, and that, regard being had to the common course of business in contract of this nature it was an essential part of the contract that the plaintiff should receive the fortnightly payments, and that on the discontinuance of the payments the plaintiff could not reasonably be expected to continue the work.In this case, the Court held that the refusal of the defendant to continue the fortnightly payments amounting to 70% of the value of work done was a breach of the contract which entitled the plaintiff to rescind.

In Ching Yik Development Sdn. Bhd. v. Setapak Heights Development Sdn. Bhd., the Court of Appeal laid down the following principles. First, where the term breached is fundamental to the contract, the innocent party is entitled to treat himself as discharged from further obligations under it. Second, where the term breached is only subsidiary or minor in nature, the innocent party may not treat himself as discharged under the contract but may recover damages for the non-performance of the subsidiary term. Thus, a party who terminate a contract upon the breach of a non-fundamental term is himself guilty of a breach of contract.

In this case relating to a contract for the sale of land, the term as to the payment of the purchase price was a fundamental term. The court held that the appellants failure to pay the purchase price was fatal to their action. On the other hand, the respondents obligation to deliver the executed instrument of transfer was merely a subsidiary term and its non-performance did not relieve the appellants of their obligations under the contract.

In Ban Hong Joo Mines Ltd. v. Chen & Yap Ltd., the excavation work were carried out by the respondents but the appellant refused to pay for the work done and issued a stop work order. The Federal Court held that the appellants refusal to pay what was already due gave the respondents the right to treat the contract as repudiated. Further, the appellants order to the respondents to stop work clearly went to the root of the contract, granting the respondents the right to treat the contract as at an end.

The above cases dealt with the type of breach which would give the innocent party the option whether to rescind the contract and to treat himself as discharged. Alternatively, the innocent party may affirm and carry on with the contract. In the next lecture on Rescission, we will examine the effects where the innocent party takes the option to rescind and terminate the contract. It will cover both rescission for breach covering the types of cases discussed in the present lecture, as well as rescission ab initio covering cases of voidable contract due to lack of consent discussed during lecture on Voidable Contract on coercion, undue influence, fraud and misrepresentation.

Thank you for your attention