DISCHARGE OF CONTRACTS

What is the meaning of Discharge of Contracts?

Discharge of contracts means when a contract is terminated

A contract may be discharged in any of the following methods:-

PERFORMANCE

DISCHARGE
CONSENT/
BREACH OF AGREEMENT
CONTRACTS

FRUSTRATION

1. Discharged by performance – Section 38

The general rule is that performance of the contract by both parties must be exact
and precise – Bolton v Mahadeva.

Section 38 (1) states that the parties must perform their promises as per the
contract and the performance must be exact and precise. Once the parties have
carried out exactly what they promised to do, there will be a complete discharge.

If no time is fixed for performance: Under s.47 – the promise must be performed
within a reasonable time

If the parties intend that time for performance of the contract shall be of the essence
of the contract, then the contract becomes voidable at the option of the innocent
party - s. 56(1).

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 Example: Ali promises to deliver goods to Muthu on 3 Jan on payment of RM3000.
On 3rd Jan., Ali delivered the goods to Muthu and on that day Muthu paid Ali
RM3000. The contract is discharge by performance.

Chua Ngah Chin V Ng Kie En – failure to discharge performance

A had 3 plots of land. A entered into an agreement with R to build a building on one
plot of the land and stipulate that if the building is completed on time R can have the
other 2 plots of land. R failed to complete the building on time and A revoke the
contract. But R continued to build and sued for specific performance for the 2 plots
of land.

Held: R failed to perform his part of the bargain and was in breach of the agreement,
therefore R could not succeed in an action for specific performance.

2. Discharge by consent or agreement between parties-Section 63

A contract that is created by consent can be discharge by consent of all parties.
Example – where the parties agree at the time of making the contract that on
occurrence of a certain event (should something happen e.g. on death or disability of
one party), one or more of the parties will be discharged.

Section 63 provides that if both parties agree to end the contract and make a new
one, then the original contract need not be performed as it has come to an end.

3. Discharge by frustration – Section 57 ( impossibility of performance):

Section 57(2) – a contract to do an act which becomes impossible to perform after
the contract is made by reason of some event which the promisor could not prevent
or become unlawful. The contract becomes void when it becomes impossible to
perform or becomes unlawful.

A contract may be frustrated where there exists a change in circumstances, after the
contract was made, which is not the fault of either of the parties,

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The effect of frustration on such contract:

Section 57 states such contract becomes void. Section 66, applicable to void
contracts, provides that ‘any person who has received any advantage under the
agreement is bound to restore it (restitution), or to make compensation for it, to the
person to whom he received it.’

Circumstances of frustration

a. Total Destruction of the subject matter:

Taylor v Caldwell [1863]

The owner of a music hall hired the hall to a concert organiser for the purpose of
holding four concerts on four days. Before the date of the first concert, the music hall
was destroyed by fire. The organiser sued the hall owner for breach of contract in
not having the premises ready for him. The court held that the contract was
impossible to perform and the owner was not liable.

b.

Krell v Henry [1903]

Henry hired a room for the sole and only purpose (but not actually expressed in the
contract) of watching the coronation procession of King Edward VII. Owing to the
King‟s illness, the procession was cancelled.

Held: Henry could be excused from paying the rent for the room as the contract was
frustrated.

Herne Bay Steam Boat Co v Hutton [1903]

This case contrasts with another case where a person agreed to hire a boat to cruise
round the fleet for the naval review during the Coronation proceedings and for a
day’s cruise around the fleet. The naval review was cancelled because of the illness
of Edward VII.

Held: Contract was not frustrated. Although the defendant’s motive in entering into
the contract was to see the naval review that was not the “common foundation of the
contract” there are other objects that were not frustrated by the cancellation.

c. War or declaration of war-supervening impossibility

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 Berney v Tronoh Mines Ltd [1949] MLJ 4 – a contract of employment was
discharged by frustration owing to the outbreak of war when Japan invaded Malaya
in 1942. Invasion of Malaya by the Japanese was a supervening event which
frustrated the contract.

d.) Supervening illegality

Here, the contract is legal when formed but as a result of a subsequent change in the
law, its performance becomes unlawful.

Lee Kin V Chan Suan Eng (1933) supervening illegality:

A lease for five yearly renewals was held to be frustrated by the enactment of a new
law prescribing annual renewals, causing the 5 yearly leases to be unlawful.

4.Discharge by breach-Section 40
Where one of the parties indicates to the other either by conduct or in clear terms an
intention not to go on with the contract, the party is said to have repudiated or
renounced the contract.

Section 40 – when one party has refused to perform or disabled himself from
performing his promise, the other (innocent) party may put an end to the contract.
This means the innocent party can treat the contract as being discharged, (‘guilty’
party cannot do this).

The innocent party has the option to either:

 Rescind the contract (under s.40 CA 1950) AND claim damages (under s.76)
OR
 Affirm the contract AND claim damages

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REMEDIES

REMEDIES

SPECIFIC
RECISSION DAMAGES INJUNCTION
PERFORMANCE

1. Rescission of contract

In contract law, rescission has been defined as the unmaking of a contract

between parties. Rescission is the unwinding of a transaction. This is done to bring
the parties, as far as possible, back to the position in which they were before they
entered into a contract.

Section 40 states that when one 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. (This means the innocent party can treat the
contract as being discharged, the ‘guilty’ party cannot do this).

Section 76 states a person who rightly rescind a contract is entitle to compensation

for any damage which he has sustained through the non-fulfilment of the contract.

2. Damages

The main purpose of awarding damages is to compensate the innocent party for
suffering loss owing to the defaulting party’s breach of contract. The law relating to
damages for breach of contract is found in ss.74, 75 & 76.

Damages are a remedy awarded as of right when a contract is breached Plaintiff has
the right to obtain damages if he has rightfully rescinded the contract unlike
specific performance which is awarded at the court’s discretion.

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Section 74: Compensation for loss or damage caused by breach of contract

Hadley v Baxendale [1854] – is the common law rule which provides that a party
may recover damages which may be reasonably supposed to have been in the
contemplation of the parties, at the time they made the contract. This rule is now
embedded in s.74.

Section 74 re-enacts the common law rule in Hadley v Baxendale and

provides the rule on damages that can be recovered:

 Damages which arise naturally in the usual course of things from the
breach;

 If they do not arise naturally or are special losses, the injured party must
show that the parties knew, at the time of making the contract, that the
special losses would likely result from the breach; but

 Such compensation is not to be given for any remote and indirect losses
sustained as a result of the breach.

The illustrations to Section 74 indicates that the party may recover, as a result of the
breach, damages for:

 other expenses incurred arising from the breach

 loss of profit due to the breach
 difference between price of goods contracted and the actual price of goods
sold.

a. Other expenses incurred - Illustration (b):

A hires B’s ship to go to Teluk Anson, and there take on board, on 1st January, a
cargo, which A is to provide, and to bring it to Port Dickson, the freight to be paid
when earned. B’s ship did not go to Teluk Anson.

A had to hire other transport for the cargo and is put to trouble and extra
expenses. A can claim compensation from B for the trouble and extra expenses
incurred.

b. Difference between prices – Illustration (c):

A contract to buy from B, at a stated price, 50 gantangs of rice, A later informs B

that he will not accept the rice. B is entitled to receive from A, by way of
compensation the amount, if any, by which the contract price exceeds that which
B can obtain for the rice at the time when A tells B that he will not accept the rice.

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 Example Contract price: RM10, 000.00
Later price RM8, 000.00

So B has suffered a loss of RM2000 due to A’s breach of contract. B is entitled to

compensation of RM2000.

c. Loss of profit – illustration (i)

A delivers to B, a carrier, a machine, to be transported, without delay, to A’s mill.
A tells B that the mill cannot operate without the machine. B unreasonably
delays the delivery of the machine, and A, as a result, loses a profitable contract
with the government. A loss a profitable contract because of B’s delay. A is
entitled to received from B, as compensation, the average amount of profit
which A would have made if the mill had operated during the delayed period, but
A cannot get the loss suffered because he lost the government contract.

Mitigation of Loss

The party asking for damages is under a duty imposed by law to mitigate the loss
i.e. to take reasonable steps to reduce or to minimized or mitigate his loss.

Section 74: Explanation states:

In estimating the loss or damage arising from a breach of contract, the means
which existed of remedying the inconvenience caused by the non-performance of
the contract must be taken into account.

This means the party claiming damages must also put effort to mitigate or reduce
his loss e.g. if he can sell or buy or do any reasonable act so as to ensure that the
loss will not be worse than it should be.

Kabatasan Timber Extraction Co. v Chong Fah Shing.

R took action for damages against A. A, had contracted to deliver 3 lots of timber
to R’s sawmill. A delivered 2 lots but left the 3rd lot some 500 feet away. R went
out to buy the logs from other sources.

The court held that there was no need for R to go to such expense and trouble of
buying the logs elsewhere when all that is required was some additional
expensed to haul the logs which was nearby into the sawmill.

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 Section 75 states that when a contract has been broken , if a sum of money has
been fixed in the contract as the amount to be paid for such breach, the party
complaining of the breach is entitled , whether or not actual damage or loss is
proved, to receive reasonable compensation not exceeding the amount stated in
the contract.

Illustration (a): A contracts with B to pay B RM1000 if he fails to pay B RM500 on

a given day. A fails to pay B RM500 on that day. B is entitled to recover from A
such compensation, not exceeding RM1000, as the court considers reasonable.

EQUITABLE REMEDIES – Specific performance and injunction:

3. Specific Performance

Specific performance is an order of the court requiring the party who is in breach of the
contract to perform his part of the contract exactly as he had promised. Specific
performance is an equitable remedy as it was first recognised by the courts of equity. It
is granted at the discretion of the courts. In Malaysia the remedy of specific
performance is provided for under the Specific Relief Act 1950.

By s.11 (1) Specific Relief Act 1950, specific performance of any contract may be
granted at the discretion of the court in the following circumstances:

(i) When the act agreed to be done is in the performance wholly or in part of a trust.

For example, A holds certain stock in trust for B. A wrongfully disposes of the stock. B
may sue for specific performance, compelling A to repurchase the shares.

(ii) Where there exists no standard for ascertaining the actual damage caused by the
non-performance of the act agreed to be done.

For example, A agrees to buy and B agrees to sell, a picture by a dead painter and two
rare China vases. A may obtain specific performance as there is no standard for
ascertaining the actual damage which would be caused by its non-performance.

(iii) When the act agreed to be done is such that pecuniary compensation for its non-
performance would not afford adequate relief.

For example, a contract of sale of land.

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4. Injunction
What is an injunction?

An injunction is an order of the court directing a person to refrain from doing an act
or continuing to do an act complained of.

Under the Specific Relief Act, an injunction is a preventive remedy.

Section 50 it states that injunction is granted as the discretion of the court.

Injunction can be describe in two types:

i. Interlocutory or interim injunction – this is a temporary injunction given for

a specific period of time. It is given to temporarily maintain the status quo until
trial.

ii. Perpetual injunction – this is a permanent relief. The party is permanently

prohibited from doing the act.

Further, both the above types of injunction can be Mandatory or Prohibitory.

E.g. An interlocutory injunction can either be a mandatory or prohibitory type of

injunction.

Prohibitory injunction – a court order to prohibited or forbid (disallow) the

person from doing or continuing the act. In can also be in the form of a restraining
order, stopping something from being done

Mandatory injunction – a court order requiring something to be done or to be

performed.

Neoh Siew Eng v Too Chee Kwang.- a mandatory injunction case:

The court granted a perpetual injunction by ordering the landlord to keep all water
supply pipes opened to the tenants and to comply with the Waterworks Department
regulations that water supply to the premise rented by the tenants must not be
disconnected.

Broome (Selangor) Rubber Plantations v R.H. Whitley. – a prohibitory case i.e.

stopping something from being done:

In this case, an injunction was granted restraining an employee from entering into an
employment contract with another employer until the expiry of his present
employment contract.