Discharge by Breach

Dr. Nuraisyah Chua Abdullah

1. Discharge by breach under common law;
2. Repudiation;
3. Fundamental breach;
4. Discharge by breach under section 40 of the Contracts Act;
5. Malaysian cases on repudiation and fundamental breach.


Discharge by breach under common law
Under 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.
Repudiation
Repudiation 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 part
Fundamental breach
When 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 Act
In 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 breach
In 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