ABBL3033 Business Law – Chapter 7: Discharge of Contracts and Remedies

7. DISCHARGE OF CONTRACTS

What is the meaning of Discharge of Contracts?

When a contract is terminated, the contract is said to be discharged and the parties to the
contract are free from the obligations arising in the contract.

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

1. By performance – S 38
2. By consent or agreement between the parties – S 63.
3. By frustration (impossibility of performance) – S 57.
4. By breach – S 40.

7.1 DISCHARGED BY PERFORMANCE – S 38

Section 38(1) - The parties to a contract must either perform, or offer to perform, their
respective promises, unless the performance is dispensed with or excused under this Act,
or of any other law.

The provision imposes a duty on the parties to perform or offer to perform their obligations
under the contract unless the law allows the parties to avoid their obligations under the
contract.

In other words, once the parties have performed their promises as per the contract, then
the contract is said to have been completely discharged.

Bolton v Mahadeva
The general rule is 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.

Example: Ali promises to deliver goods to Muthu on 3 Jan with 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 1 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.

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7.2 DISCHARGE BY CONSENT OR AGREEMENT BETWEEN PARTIES – S 63

Section 63 states a contract is discharged by agreement when both parties mutually agree
to end their contractual relationship. This option is allowable under Section 63:

“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.”

Illustration
A owes money to B under a contract. It is agreed between A, B and C that B shall
henceforth accept C as his debtor, instead of A. The old debt of A to B is at an end, and a
new debt from C to B has been contracted.

There must be proof of agreement between the parties, without which Section 63 cannot
be invoked.

The proof of intention to substitute old obligations with new one through a written
agreement was illustrated in the case of Polygram Records Sdn Bhd v The Search.
Issue: whether the 2nd contract entered by the D with P is valid?
Held: As long as the parties has signed the second contract, it had the effect of replacing
the old contract.

7.3 DISCHARGE BY FRUSTRATION – S 57

A contract is frustrated when there is a change of circumstances makes it impossible for
the parties to perform the contract (impossibility of performance).

The contractual parties were not at fault for the change of circumstances that caused the
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.

7.3.1 Instances of Frustration

a) Outbreak of War
HA Berney v Tronoh Mines Ltd
Plaintiff sued for breach of contract of service. When Malaya was attacked by the
Japanese, the European staff at defendant’s company was evacuated from Tanjong
Tuallang. The plaintiff chose to remain at Tanjong Tuallang and claim damages from

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defendant. The defendant stated that due to the Japanese occupation, the contract of
service between them and the plaintiff was discharged by frustration.
Held: Invasion of Malaya by the Japanese frustrated the contract. Therefore, no breach of
contract by the defendant.

b) Destruction of subject matter

Taylor v Caldwell
The D agreed to let to the P the use of his music hall and garden for the purpose of
entertainment. Before the day of the performance arrived, a fire destroyed the music hall.
The D, through no fault on his own, was unable to perform the contract by letting the hall
to P.
The court held that the contract was frustrated due to the destruction of subject matter, i.e.
the hall, without the fault of either party.

c) Non-occurrence of particular event

Krell V Henry
The P placed advertisements outside his flat offering to let windows to view the coronation
procession of the new king. The P told the D that the flat gives a good view of the
procession and D agree to hired the flat for £75 for 2 days. D paid deposit of £25 and
promised to pay the balance of £50 later. Unfortunately, the King’s serious illness caused
the cancellation of the procession and P claimed for the balance of £50. The court held
that the contract was void as the procession of the King was the foundation of the
agreement and it excused the D from paying the £50 balance.

d) Death or incapacity for personal services

Sathiaval a/l Maruthamuthu V Shell Malaysia Trading Sdn Bhd
The court held that an employee’s inability to continue with his employment as a result of
2 years detention by the police has rendered the employment contract frustrated.

e) Supervening illegality / Statutory prohibition

Supervening illegality affects the performance of the contract after its formation.
Supervening illegality often happen due to the change in the law.

Lee Kin V Chan Suan Eng

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

7.3.2 Consequences of frustration

Section 57(2) states that a contract discharged by frustration becomes void.

Section 66 provides that when a contract becomes void, any person who has received
any advantage under the contract is bound to restore it (restitution), or to make
compensation for it, to the person to whom he received it.

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7.4 DISCHARGE BY BREACH – S 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 refusal to perform or disability must be due to the fault of the ‘guilty’ party.

i. Refusal to perform
Where the ‘refusing’ party informs the other party either by conduct or expressly that he
does not want to continue with the contract, the refusing party is said to ‘repudiate’ the
contract.

Wong Poh Oi v Getrude Guok.

Here the D had agreed to build a house for the P. The P caused certain extra items to be
done which she claimed were necessary to conform to the original plan. D claimed that
the work were extras and demanded payment for them. On failure of such payment D
attempted to repudiate the contract and sold the house to another person. P claimed
damages.
Held: The extra work became necessary to make the house conform to the original plan
and thus P was not liable to pay for them and D were ‘wrong’ in repudiating the contract
when P refused to pay for them.

ii. Disability to perform

a. A contract is discharge only if the disability to perform is caused by the fault of the
guilty party.

b. If the disability is because of something beyond the control of the parties – then
neither party is at fault, the contract is discharged through frustration.

7.4.1 Consequences of breach of contracts

Section 65 provides that if a party choose to rescind a contract, the other party need not to
perform the contract. However, if the party who terminates the contract received any
benefit, he must restore or ‘give back’ the benefit to the other party.

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7.5 REMEDIES
In a breach of contract, the party who is not at fault may claim one of the following
remedies i.e. Rescission of contract, Damages, Specific Performance, Injunction and
Quantum Meruit.

7.5.1 Rescission of contract

When there is a breach of condition the injured party may treat the contract as though it
has never been made at all.

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.

7.5.2 Damages
Damages is granted to a party as monetary compensation for the loss or damage suffered
due to breach of contract. The law relating to damages for breach of contract is found in
Section 74, 75 & 76.

7.5.2.1 Damages that are recoverable

Section 74 - Compensation for loss or damage caused by breach of contract
(1) when a contract has been broken, the party who suffers by the breach is entitled to
receive, from the party who has broken the contract, compensation for any loss or
damage cause by him, which naturally arose in the usual course of things from the
breach, or which the parties knew, when they made the contract, to be likely the result
from the breach of it.
(2) Such compensation is not to be given for any remote and indirect loss or damage
sustained by reason of the breach.

Section 74 is the statutory enunciation of the rule in Hadley v Baxendale [1854] – where
the common law rule 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.

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

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• other expenses incurred arising from the breach

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

a. Other expenses incurred - Illustration (b):

Ahires B’s ship to go to Teluk Anson, and there take on board, on 1 st 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):

Acontract 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.

Example Contract price: RM10, 000.00

Later price : RM 8, 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)

Adelivers 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.

7.5.2.2 Damages that are not recoverable

Section 74 (2) states that no compensation is to be given for any remote and indirect loss
or damage suffered due to the breach of contract.

Illustration (n): A contracts to pay a sum of money to B on a day specified. A does not pay
the money on that day. B, as a result of not receiving the money on that day, cannot pay
his debts and is totally ruined. A is not liable to make good to B the situation but only to
pay the sum of money he owed plus interest.

Mitigation of Loss

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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 3 rd 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.

7.5.2.3 Compensation for breach of contract where penalty is stipulated 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.

7.5.3 Equitable Remedies – Specific Performance and Injunction:

1. Specific Performance
Specific performance is governed by the Specific Relief Act 1950, is a decree or an order
of the court directing the party who failed to perform his part of the contract to perform it
specifically according to the terms of the contract.

Section 11(1) SRA: Circumstances where specific performance will be enforced:

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

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Illustration: A holds certain stock in trust for B. A wrongfully disposes of the stock.
The law creates an obligation on A to restore the same quantity of stock to B, and B
may enforce specific performance of this obligation.

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

Illustration: A agrees to buy, and B agrees to sell, a picture by a dead painter and
two rare China vases. A may compel B specifically to perform this contract, for there
is no standard for ascertaining the actual damage which would be caused by its non-
performance.

(c) When the act agreed to be done is such that pecuniary compensation for its
nonperformance would not afford adequate relief i.e. payment of money is not an
adequate relief.

Illustration (a): A contracts with B to sell him a house for RM1,000. B is entitled to a
decree directing A to convey the house to him, he paying the purchase- money.

(d) Where pecuniary compensation cannot be obtained for the breach of the act
agreed to be done.

Illustration: A transfers without endorsement, but for valuable consideration, a

promissory note to B. A becomes insolvent, and C is appointed his assignee. B may
compel C to endorse the note, for C has succeeded to A's liabilities and a decree for
pecuniary compensation for not endorsing the note would be fruitless.

Under section 21 SRA: Discretion of the court in decreeing specific performance i.

The remedy is only given at the discretion of the court.
ii. The Court may refuse specific relief where the defendant would suffer undue
hardship.
iii. Specific performance is usually ordered in contracts relating to land where
monetary compensation would be inadequate.

Section 20 SRA 1950 - Contract which cannot be specifically enforced.

However, specific relief will not be granted in the following situations:
a. Where money compensation is an adequate relief – section 20 (1) (a)
b. Where the contract is for personal services – section 20 (1) (b)

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c. Where the terms of the contract are uncertain – section 20(1)(c).

d. Where there is evidence of fraud
e. Where to order specific relief would require the constant supervision of the court –
section 20

2. 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 SRA states that injunction is granted at 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.

Category of Injunctions:
- In terms of time, an injunction may be temporary or permanent and category wise, it may be
mandatory or prohibitory.

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.

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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.
- In Pertama Cabaret Nite Club v Roman Tam (1981), a night club owner obtained temporary
injunction order to prohibit a singer who has contracted with his night club from singing for a
rival club in Kuala Lumpur during the fixed period of their contract.

7.5.4 Quantum Meruit

Section 71 CA - When a person lawfully does anything for another person, or delivers
anything to him, not intending to do so gratuitously, and such persons enjoys the benefit
thereof, the latter is bound to make compensation to the former in respect of, or to restore,
the thing so done or delivered.

Illustration: A, a tradesman, leaves goods at B’s house by mistake. B treats the goods as
his own. He is bound to pay A for them.

Teras Kimia Sdn Bhd v Government of Malaysia

A rendered services to B after the expiry of the original contract. B accepted A’s services.
Later, no new contract was entered between them. B did not pay A for the services
rendered. A claimed compensation from B for the work done on quantum meruit basis.
The court held that there was a new contract between A and B and A was entitled to
receive reasonable compensation from B for the services provided.

Calculation of the amount due under quantum meruit.

The court will calculate, for services rendered, the amount due based on the value of the
services (i.e., time and usual rate of pay or by customary charge).

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