September 2002, question 2
Discuss the ways in which a contract can be discharge.
When contract is terminated, it is said to be discharge and the contracting parties are free
from further obligations arising from it. Discharge means the termination of a contractual
obligation either by
i) The parties performing the contract as agreed
ii) Mutual agreement of the parties
iii) The obligated performance becoming illegal
iv) The purpose of the contract becoming impossible or impracticable to fulfill.
v) The performance being frustrated.
A contr1act may be discharge by any one of the following ways
i) By performance
ii) By consent /agreement by the parties
iii) By impossibility /frustration
iv) By breach
DISCHARGE BY PERFORMANCE
Performance of a contract means the carrying out of contractual obligations (promises) by
one or both parties.
Discharge by performance occurs where the parties to a contract perform their obligation
under it. It is the normal way in which the contracts are discharge. As a general rule,
performance must be strictly in accordance with the terms of the contract unless the
parties have agreed otherwise. Section 40 of the Contract Act 1950 provides,
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 word or conduct, his acquiescence in its continuance
There are four exceptions to the general rule requiring complete performance
i) Where the contract is divisible
In an ordinary contract of employment, where it is usual for payment to be made
periodically. In Bolton v Mahadeva (1972) the plantiff had contracted to install central
heating for the defendant for $ 560, it turned out to be defective and required a further $
179 to put right. It was held that Bolton could not claim any of the money as he had failed
to perform the contract. An agreement to supply a bathroom suite was divisible from the
overall agreement, however, and had to be paid for.
ii) Where the contract is capable of being fulfilled by substantial performance.
This occurs when the essential element of an agreement has been performed, but some
minor part remains to be done or some minor fault remains to be remedied. The party
1
Contract Act 1950
Per Gibbs
Nicholson V revill
who performed the act can claim the contract price, although they remain liable for any
deduction for the work outstanding. In Hoening v Isaacs (1952), Hoening was employed
by Isaacs to decorate his flat. The contract price was $ 750, to be paid as the work
progress ed. Isaacs paid a total of $400, but refused to pay the remainder as he objected
the quality of the work carried out. Hoening sued for the outstanding $ 350. It was held
that Isaacs had to pay the outstanding money less the cost of putting right the defects in
performance. These latter costs amounted to just under 56. This should be compared
with Bolton v Mahadeva above, in which no payment was allowed for work done in a
totally unsatisfactory manner.
iii) Where performance has been prevented by the other party
Under such circumstances, the party prevented from performance can sue for breach
of contract or on a quantum meruit basis.
iv) Where partial performance has been accepted by the other party.
This occurs in the following circumstances, A orders a case of 12 bottles of wine
from. B only has 10bootles if he wants to, but if he accepts them he must pay a
proportional price for them.
Time and place for performance
As a general rule, a promisor must be prepared to perform his obligation at the time and
place at which has undertaken to do. The question of what is a proper time and place is,
in each particular case, a question of fact. On the other hand, when a promise is to be
performed on a certain day, and the promisor has undertaken to perform it without any
application by the promisee, the promisor may perform it at any time during the usual
hours of business on the day and at the place at which to the promise ought be performed.
Where no time is fixed for performance and an application by the promisee is not
required, the promise must be perform within a reasonable time. The question of what is
a reasonable time is, in each particular case, a question of fact. Time is said to be the
essence of the contract. Section 56 of the Contract Act lays down the law relating to the
effects of such terms, and it has been judicially recognized that this section does not
differ from the common law. Salleh Abas F.J in Sim Chio Huat v Wong Ted Fui
expressly approved the statement of the law in Yeoh Kim Pong Ltd v Ng Kim Pong.
His lordship stated that if in a contract in which time is of the essence, a party fail to
perform it by the stipulated time, the innocent party has the right either to rescind the
contract, or to treat it as still subsisting. If he treats it either expressly or by conduct as
still continuing, the contract exist but time ceases to be of the essence and become at
large. In the instant case, the Federal Court held that by allowing the delivery dates to
pass, by agreeing to the work being done by the developer and by further ordering extra
work, the respondent had waived his right to rescind the contract, and consequently was
deemed to have opted to treat the contact as subsisting. The freedom to contract wit
respect to time of performance was also reaffirmed in Yeow Kim Pong Ltd v Ng Kim
Pong when the Rt Hon L.M.D de silva, delivering the judgment of the Privy Council,
said:
`The question whether the time is the essence of a contract is one to be determined by
ascertaining the real intention of the parties. This is to be gather by the examination
amongst other things of attendant circumstances`
Therefore, the mere inclusion 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. The Federal Court in
Ganam d/o rajamany v Somoo s/o Sinnah, ruled that since there was no provision in
the contract expressing time to be of the essence and the nature of the land sod was not
such as to give that impression, the vendor could not rescind the contract for failure by
the purchaser to settle the balance of the purchase price on the specified date. Where the
parties agree that time is of the essence of the contract and the promisor fails to perform
at or before the stipulated time, `the contract, or so much of it has not been performed,
becomes voidable at the option of the promisee. In Eng Mee Yong & Ors V
Letchumanan, Lord Diplock, on considering ye effect of failure to pay he purchase price
within a specified date where the time is of the essence, held that the caveator had
breached a condition of the sale agreement which entitled the caveatees to elect to treat
the contract as at end. But if the promisee accepts performance after the agreed time, he
cannot claims compensation for any loss occasioned by the non-performance of the
promise at the time agreed, unless at the time of acceptance of the delayed performance,
he gives notice to the promisor of his intention to claim compensation. In Pan Ah Ba v
Nanyang Constuction Sdn Bhd, The Hight Court expressed the view that section 56(3)
of the Contract Act requires the party who agrees to accept performance outside the
stipulated time to give notice to the defaulting party of its intention to claim damages for
any loss suffered ea a consequence of the delay. The R.T Hon L.M.D de silva further
stated that the subsection do not place a limitation upon the freedom of the parties to
contract when one of them has failed to perform his promise at the time agreed. The
contract could be reaffirmed in its original or a varied form and subject to such conditions
as may be agreed upon by the parties. In Sharikat Eastern Plastic Industry v Sharikat
Lam Seng Trading. The court decided that even when time is stipulated to be of the
essence of the contract, it may be waived so that time became at large. But if a party
entitled wanted to make time again of the essence of the contract, a reasonable notice is
required. In the instant case, the court held that the plaintiff had waived the initial
stipulation making time the essence and had failed to give reasonable notice to revive it.
Similarly, in Wong Kup Sing v Jeram Rubber Estates Ltd, the High Court held that
the defendants had failed to give reasonable notice to the plaintiff that it intended to
terminate the contract after having agreed to an extension of time for performance in a
contract for the purchase of a rubber estate. In Siah Kwee Mow & Anor v Kulim
Rubber Plantation Ltd, Abdoolcader J., relying on the number of English authorities,
held that the mere extension of time need not amount to a waiver in every case. His
Lordship said that there was a distinction between a waiver and an extension of time
which was not a waiver. The earlier case of Wong Kup Sing v Jeram Rubber Estates Ltd
was distinguished. His Lordship cited with approval the following dictum of Geoge
Jessel MR in Barclay v Messenger
`It appears to me plain that a mere extension of time, and nothing more, is only waiver to
the extent of substituting of the essential character of the time`.
Place for the performance of the contract is dealt with by section 50of the Act. Where no
place is specified for performance, and the promise is to be performed without
application by the promisee, it is the duty of the promisor to ask the promisee where he
would like the contract to be performed.
Performance of Reciprocal Promise
In section 52 `When a contract consists of reciprocal promises to be simultaneously
performed, no promisor need perform his promise unless the promisee is ready and
willing to perform his reciprocal promise. In Caltex Oil (Malaysia) Ltd v Ho Lai Yoke
& Anor Ong J.of the High Court held that certain clauses in an option agreement to
purchase a parcel of land were reciprocal promises intended to be simultaneously
performed within the meaning of section 52, and in the absence of express terms to the
contrary, it was a well established practice that in a contract for the sale and purchase of
land, payment was not a condition precedent to execution or transfer. Un the instant case,
the plaintff were allowed specific performance of the contract, and the defendants
contention that the plaintiffs had defaulted in payment was rejected. In fact the court
found that non –payment of the agreed sum was entirely due to the default of the
defendants being unable to perform their part of the contract and that the sum of money
was ready and available at all times for payment to the defendants upon their production
of the relevant documents of title, which they failed to do. The same rule was applied in
Central Malaysia Development Ltd v Chin Pak Chin concerning an agreement for the
sale of land where the defendant-vendor was to execute a valid transfer and deliver
vacant possession of the land to the plaintiff upon paying a deposit. The Court decided
that they were reciprocal promise to be performed simultaneously. Because the plaintiff
was ready and willing to performance as the defendant could not give vacant possession
by the due late, the latter was in breach which entitled the plaintiff to repudiate the
contract and obtain the return of the deposit.
Where the order in which reciprocal promises is to be performed is expressly fixed by the
contract, the contract must be performed in that order. Thus if A contracts to build a
house for B at a fixed price, A` s promise to build the house must be performed before
B`s promise to pay for it. But where the order of the performance is not expressly fixed
by the contract, they must be performed in that order which the nature of the transaction
requires. Consequently, if A and B contract that A shall make over his stock-in –trade to
B at a fixed price, and B promises to give security for the payment of the money, A`s
promise need not be performed until the security is given before he delivers up his stock,
for the nature of the transaction requires that A should have the security before he
delivers up his stock.
Where the performance of one party depends on the prior performance of the other party,
the latter cannot claim the performance of the reciprocal promise if he himself fails to
perform his part of the bargain. On the contrary, he is liable to compensate the other party
for any loss sustained by his non-performance. Four examples are provided in the
illustration to section 55 which deals with the obligation. Two of them are produced
below for illumination of the principle.
b) A contracts with B to execute certain builders` work for a fixed price, B supplying the
scaffolding and timber necessary for the work. B refuses to furnish any scaffolding or
timber, and the work cannot be executed. A need not execute the work, and B is bound to
make compensation to A for any loss caused to him by the non –performance of the
contract.
c) A contracts with B to deliver to him, at a specific price, certain merchandise on board a
ship which cannot arrive for a month, and B engages to pay for the merchandise within a
week from the date of the contract. B does not pay within a week. A`s promise to deliver
need not be performed, and B must make compensation.
When a contract contains reciprocal promise, and one party to the contract prevent the
other from performing his promise, section 54 provides that the contract becomes
voidable at the option of the party so prevented. He is entitled to compensation from the
other party for any loss which he may sustain as a consequence of the non-performance
of the contract suppose that A and B contract that B shall execute certain work for A for
$1000 but A prevents him from doing so by repeatedly failing to allow him access to his
land, the contract is voidable at B`s option. If B elects to rescind it, he is entitled to
recover from A compensation for any loss which he has incurred by its non-performance.
Contingent Contract
Section 32 defines a contingent contract as a contract to do or not to do something, if
some event, collateral to the contract, does or not happen. It is a contingent contract if A
contracts to pay B $100 000 if B`s house destroyed by fire. Example of the contingent
contracts are insurance contracts and guarantee.
Section 33 declares that contracts contingent upon the happening of a future, uncertain
event cannot be legally enforced until that event has happened. If the event becomes
impossible, such contracts become void. Suppose X contracts with B to sell B a horse at a
specified price if C, to whom the horse has been offered refuses to buy. The contract
cannot be enforced unless C refuses to buy the horse, and if the horse dies before C has
indicated his intention, the contract between A and B is void as the event has become
impossible.
On the other hand, if the contract is contingent on an uncertain future event not
happening, then it can be enforced when the happening of that event becomes impossible,
and not before. So if A agrees to pay B a sum of money if a certain ship does not return
and the ship is sunk, the contract can be enforced when the ship sinks.
Section 35 provides that if a contract is contingent upon how a person will act at a future
unspecified time, the event shall be considered to become impossible when such person
does anything which renders it impossible that he should so act within any definite time,
or otherwise than under further contingencies. Thus if A agrees to pay B a sum of money
if B marries C but C then marries D. The marriage of B to C must now be considered
impossible, although it is conceivable that D may die or C and D may divorce, and that C
may afterwards marry B.
Section 36(1) deals with contracts contingent on the happening of uncertain event
within a fixed time and section 36(2) deals with the non –happening of an uncertain
event within a fixed time. In the former, the contract become void at the expiration of the
fixed time or the event becomes impossible, and illustration (a) gives this example
A promise promises to pay B a sum of money if a certain ship returns within a year. The
contract may enforced if the ship returns within a year, and becomes void if the ship is
burnt within the year.
In the latter case of non-happening of uncertain event, the contract becomes legally
enforceable when the time fixed has expired or if it becomes certain that the event will
not happen. Consequently, if A promises to pay B a sum of a money if a certain ship does
not return within a year, and the ship does not return within the year or is destroyed by
fire within the year, the contract become enforceable
In Aberfoyle Plantation Ltd v Khaw Bian Cheng which was decided by the privy
council, Lord Jenkins reiterated that the time for fulfillment of a condition in a contingent
contract depends on the proper construction of the contract. That is to say, it is really
dependent on the intention of the parties as found in the contract. Subject o that
overriding consideration, His Lordship laid down the following principles in respect of a
contract of sale.
(i) Where a conditional contract of sale fixes a date for a completion of the sale, the
condition must be fulfilled by the date.
(ii) Where a conditional contract of sale fixes no date for the completion of the sale, the
the condition must be fulfilled within a reasonable time.
(iii) Where a conditional contract of sale fixes (whether specifically or by reference to the
date fixed for completion) the date by which the condition is to be fulfilled, then the date
so fixed must be strictly adhered to, and the time allowed is not to be extended by
reference to equitable principles.
The Federal Court in Jaafar bin Ibrahim v Gam Kun Kim, section 36(1) of the Act and
held that a date stipulated in the conditional contract had to be strictly observed and it
could not be extended by reference to equitable principles. Azmi F.J decide that this was
a case where time was not merely the essence of the contract but fulfillment of the
promise by the appellant to obtain the approval on (the specified date) was a condition
precedent to the whole contract. Similarly in the Australian case of Perri v Coolongatta
Investment Pty Ltd, the High Court decided that a contract of sale subject to the
purchaser completing the sale of his own property to a third party was a contingent
contract, so that expiry of the time would entitle either party, if not in default, to elect to
treat the contract as at an end if the condition has not been fulfilled or waived. It was
further said that it was not necessary first to give notice calling on the party in default to
complete the contract or to fulfill the condition.
Tender of Performance
Section 38(1) requires party to a contract to perform or offer to perform their respective
promises. If a tender is made exactly in accordance with the promise, and it is rejected,
the rejection frees the promisor from further liability without affecting his rights to claim
against the other party. Section 39(2) lays down four conditions before an offer of
performance can be effective namely
1) It must be unconditional
2) It must be at a proper time and place
3) It must be made under such circumstances
Whom it is made may have a reasonable opportunity of ascertaining that the person
by whom it is made is able and willing there and then to do the whole of what he is
bound to do and
4) If the offer is to deliver anything to the promisee, the promisee must have a
reasonable opportunity of seeing that the thing offered is the thing which the promisor
is bound by his promise to deliver
The illustration to section 39 gives an example of item four above where A contract
to deliver to B, at his warehouse, on the 1st of March, 100 bales of cotton of a
particular quality. To constitute a valid tender, A must bring the cotton to B`s
warehouse on the appointed day in circumstances that B may have a reasonable
opportunity of satisfying himself that the thing offered is cotton of the quality
contracted for, and that there are 100 bales. The of the section 39(2) was considered
in MM Ally & Co v Chellamah where the landlord sued for the possession of a
building on the ground that rent had not been paid. The defence was the rent due had
been tendered. The issue before the Court of Appeal was whether rent due was in
arrears and whether there had been a sufficient tender of rent by the tenants. The
relevant part of the judgment given by Briggs J. was as follow
`A mere offer by letter to pay a some due does not ordinarily amounted to a sufficient
tender in this country, since it does not afford the promisee the facilities set out in the
paragraph (b) of subsection (ii) of section 38.But the requirements of section 38 are
practical, and not merely technical, and the question whether those requirements have
been fulfilled can only be answered by reference to the facts of a specific case. The
law here is not the same as in England, and it is not correct here to say without
qualification that on tender of payment actual money must be produced. The practical
test is, assuming the creditor desires to obtain payment, does the tender afford him an
immediate and certain means of obtaining payment either in cash or, if he is willing to
accept, in another medium, eg cheque. Willingness to adopt another medium may be
inferred from past conduct. If in a serious of transactions cheques have always been
accepted, it would be unreasonable to say that tender by cheque was improper, unless
he had been given beforehand that a cheque was no longer acceptable, or
circumstances were such that the cheque would not be meet.
Discharge By agreement
A contract that is created by consent can be extinguished by consent, expressed or
implied. The consent of all parties to the contract is necessary. Expressed consent
may be given at the time of the contract or subsequently. For instance, the parties may
agree at the time of making the contract that on the occurrence of an event, one or
more parties will be discharge. Consent given subsequent to the contract may be a
waiver, release, novation, remission or rescission.
Section 63 and section 64 of the Contract Act provide for the discharge of contract
by consent. Section 63 deals with the effects of novation, rescission and alteration,
and reads as follow:
If the parties to a contract agree to substitute a new contract for it, or to rescind or
alter it, the original contract need not be performed.
Novation is the substitution of a new contract for an earlier one, particularly a
contract between a creditor, a debtor and a third party whereby they agree to
substitute a third party for the debtor or creditor under the original contract which will
be discharge.
Section 64 dealts with remission of performance and reads as follow:
Every promisee may dispense with or remit, wholly or in part, the performance of the
promise made to him, or may extend the time for such performance, or may accept
instead of it any satisfaction which he think fit.
The dispensation or remission of performance as enacted in section 64 may be
applied in the following fact situation:
1) Payment of a lesser sum in satisfaction of a larger sum is binding in the promisee
if he accepted it. The English rule in Pinnel`s case and affirmed by the House of
Lords in Foakes v Beer, requiring consideration for the remission has no
application here.
2) Payment of a lesser sum by a third party to satisfy a larger debt and accepted by
the promisee is a good discharge of the original debt. This law is similar to the
English Law as established in Hirachand Punamchand V Temple. In Kerpa
Singh v Bariam Singh, the Federal Court in an unanimous decision applied this
rule to the situation where a third party, the son of the appellant debtor, made an
offer of $4,000to the creditor`s solicitor in discharge of $8650 on the condition
that the creditor could either return the cheque to the offeror or retain it and
discharge the debtor`s debt. Their Lordship found that the creditor`s conduct in
cashing the cheque and retaining the money would be considered an agreement to
discharge the debtor from any further liability.
3) If the promisee accepts payment in satisfaction of an unascertained sum, the
payment is a discharge of the amount.
4) An arrangement for the settlement of debts between a debtor and his creditors is
also binding despite the absence of consideration
Discharge by Impossibility
Section 57 lays down the relating to two categories of impossibility of performance, first,
impossibility of performance at the time a contract is made and impossibility after it has
been made. Section 57 (2) lays down a rule of positive law and does not leave the matter
to be determined according to the intention of the parties. Therefore, the doctrine of
frustration is applied not on the ground that the parties themselves have impliedly agreed
to release each other from the performance of the contract, but on the basis of
supervening impossibility causing the whole purpose of a contract to be radically
different or its performance has become `unlawful`.
A contact may be discharge by supervening impossibility or illegality in any of the
following circumstances:
1) Destruction of the subject-matter of the contract such as in Taylor V Caldwell, a
classic English case, where a music hall hired by the defendant to the plaintiff for
a series of concert was accidentally burnt down before the date of the concert. In
Berney v Tronoh Mines Ltd, a contact of employment was discharge by
frustration on the outbreak of war when japan invaded Malaysia.
2) A contract may also be frustrated if supervening events defeat the whole purpose
or object of the contract as in Krell V Henry, another classic English case, where
a room was hired for the sole purpose watching the coronation procession of King
Edward VII but owing to the king`s illness, the procession was cancelled. It was
held that Henry could be excuse from paying rent for the room as the contract was
frustrated
3) Death or personal incapacity will also discharge the contract when the party has
undertaken a personal obligation such as a contract of employment. Here, the
personal qualifications and skill of the person form the basis of the contract.
4) Supervening illegality also discharges a contract may be legal when formed but
later, owing to a change in the law, its performance may become unlawful. Thus a
contract for the sale of certain goods will be discharged of, after it had been made,
a new law prohibits all dealing s in such goods. In LeeKin v Chan Suan Eng, a
lease for five yearly renewals was held to be frustrated by the enactment of a
new law prescribing annual renewals. In Abdul Kader v Shaw Bros Ltd, a
monthly tenancy agreement was frustrated by the enactment of a law retrospective
effect. A declaration of war would as a general rule frustrate all Ccntract with
enemies aliens. Mintell J. in Finelvet AG v Vinava Shipping Co Ltd, the
Chryalis noted that it was not the declaration of war itself that brought about the
frustration but rather acts done in furtherance of the war. Consequently there was
no irrebuttable presumption that a declaration of war renders the performance of
all contracts illegal.
Discharge By Breach
When a promisor fails to perform his obligations or to tender performance, there
is a breach of the contract which entitles the party not in breach to take
appropriate action which may include repudiation. The statutory definition of
discharge by breach as enacted in section 40 of the Contract Act is co-extensive
with English law and reads as follow:
`When a party to contract has refuse 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`.
The right to` put an end to that contract` may be exercise in two situations,
namely refusal by the promisor to perform and disability to perform. The party
not in breach has the option either to continue with the contract and claim
damages or repudiate the contract. Continuation with the contract despite the
breach may be `signified by words or conduct`.
It is clear that a refusal to perform when performance of the obligations is due
will enable the party not in default to repudiate, but that which is difficult to
determine is the question of when a party be considered to have refused to
perform and whether the refusal is in respect of a `promise in its entirety`. In most
instances, a party in default does not categorically state that he is refusing to
perform and it is often a risky business for the party not in default to decide if the
former `s conduct constitutes a refusal. A wrongful repudiation of the contract,
say on account of a delay in payment or delivery, may open himself to a counterclaim by the other party.
The second issue of refusal or disability from performing a `promise in its
entirety` is not entirely clear in meaning. Courts in England and local courts have
more often than not interpreted the right to repudiate only if a breach `goes to the
root of the contract `, `breach of an essential part of the contract` or `breach of a
fundamental term`. One can only conclude local courts are likely to take on one of
these meanings as in Choo Yin Loo v Visuvalingam Pillay Supra when
Elphinstone C.J expressed the view that only a breach of an essential part of a
contract would entitle the innocent party to repudiate.
A contract may be repudiate even before the time of performance is due, and this
is often referred to as an anticipatory breach. It may occur when the promisor
does an act which makes the performance impossible or he expressly renounces
the contract before the due date. The innocent party has an option either to accept
the repudiation then and there, and sue for the damages, or he may disregard it. If
he adopts the latter course of action, he keeps the contract alive for the benefit of
the other party as well as his own, in which case, he remains subject to all his own
obligations and liabilities under the contract and also enables the other party to
change his mind and complete the contract, notwithstanding his previous
repudiation. The latter party may also avail himself of any excuse for nonperformance before the due date such as supervening impossibility.
A final point that should be noted is that a disability to perform must be caused by
the party in default and not the result of the occurrence of some event beyond his
control in which case, the contract may be discharge on the other grounds such as
frustration.