RESCISSION FOR BREACH

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Definitions Rescission means the abrogation of a

contract, effective from its inception, thereby restoring the parties to the positions they would have occupied if no contract had ever been formed

It also means cancellation or termination of a contract

When option to rescind arises One of the options to rescind a contract is in the

cases of breach of contract.

Under common law, if a breach is so serious that it goes to the root of the contract, the innocent party may elect to terminate performance of the contract from that point or affirm the contract and treat the contract as still continuing

Section 40 of Contracts Act 1950 states that “when a party to a contract has refused to perform, or disabled himself from performing, his promise in its entirely, the promise may put an end to the contract, unless he has signified, by words or conduct, his acquiescence in its continuance”

Muralidhar Chatterjee v International Film Co Ltd It was held that a contract which may be put to an end under section 40 of the Contracts Act is a voidable contract and rescission under section 65 of the Contracts Act applies.

Section 65 of the Contracts Act 1950 states that “when a person at whose option a contract is voidable rescinds it, the other party thereto need not perform any promise therein contained in which he is promisor. The party rescinding a voidable contract shall, if he has received any benefit thereunder from another party to such contract, restore the benefit, so far as may be, to the person from whom it was received.

Section 56(1) of Contracts Act 1950 deals with specific breach. This section provides that “… the contract, or so much of it as has not been performed, becomes voidable at the option of the promise…”

White and Carter(Councils) Ltd v McGregor The Hous of Lord held that the appellants were entitled to choose to go on with the performance of the contract. However, the House of Lord laid down two restrictions on the innocent party’s right to affirm. Firstly, when the contract requires the cooperation of both parties and that cooperation is not approaching, the innocent party cannot affirm the contract. Other than that, if it is found that the party has no legitimate interest, financial or otherwise, in performing the contract rather than claiming damges, the innocent party cannot affirm the contract too.

Exercise of option to rescind(a) The contract does not terminate automatically

(b) The option must be exercised and communicated within a reasonable time

(c) communication of rescission by giving notice must be clear

(d) the option taken is final and binding

(e) the right to rescind the contract must be waived are the principles regulating the exercise of the option to rescind

(a) The contract does not terminate automaticallyP Palakrishnan a/l Perianana lwn Lrishnamoorthy a/l Sinnah dan satu lagi

The High Court held that there is no concept of an automatic termination. On the basis of the other party’s breach, a party who intends to terminate a contract must state his intention to do so in writing. A notification is still necessary even if an agreement provides for termination without having to give notice. The exercise of option must be conducted by the innocent party who has the option whether to rescind or to affirm a contract. The decision must be communicated to the other party within a reasonable time.

(b) The option must be exercised and communicated within a reasonable time Chin Kim & Anor v Loh Boon SiewFacts : the parties had entered into a contract for the sale of a piece of land. On May 5, 1962, the purchaser purported to exercise his option under the contract of sale and sent $40,000 to the vendors. On or about June 8, 1962, the vendors returned the deposit on the ground that the option had not been duly exercised. Until the writ in the action was issued on August 29, 1966 in which he claimed specific performance of the contract, the purchaser took no further steps.

Held : Federal Court held that the purchaser should have made a clear stand as to whether or not he accepted the repudiation or refused it on the repudiation of the contract by the vendors. The Federal Court further held that after the breach of the sale and purchase agreement by the vendors, it is not reasonable for a purchaser to take four years to decide his action. The proper inference was that he had accepted the repudiation in the view of the delay of the purchaser.

(c) Decision of rescinding must be communicated

Section 67 of the Contacts Act states that the rescission of a voidable contract maybe communicated or revoked in the same manner, and subject to the same rules, as apply to the communication or revocation of a proposal.

Sections 3, 5 and 6 of the Contracts Act provide the rules on the communication and revocation of a proposal.

Perkayaan OKS No 2 Sdn Bhd V Kelantan State Economic Development Corp Facts : The appellants had entered into an

agreement with the respondents at which point that the appellants were acknowledged to carry out logging in a timber concession. By claiming that the appellants had unexcused failure to do the agreement by infringing clause 18, inter alia, by assigning the main agreement to a third party without the respondents’ written consent, the appellants were served a notice to terminate the agreement by the respondents

Held : The Federal Court held that the respondents’ notice to the appellants to terminate the agreement was unfinished as the matters set out were ambiguous and vague. The notice of termination must contain clear details for the termination to be effective. The respondents’ accusation that the appellants had assigned their rights under the main agreement to third parties lacked details on the identity of the third parties. In order to allow the appellants to admit or to deny, the claim must be sufficiently particularized. Such an ambiguous notice did not amount to a legal notice

(d) Decision of rescinding is irrevocableGoh Hooi Yin v Lim Teong Ghee & OrsHeld : A person who has open to him two alternatives courses or remedies must elect between them and exercise such election in such a way that the other party may know which attitude he is adopting. Once he has exercised his option either way, he is bound by it (Haynes V Hirst (1927) 27 SR (NSW))

(e) The right to rescind the contract must be waived are the principles regulating the exercise of the option to rescindSim Chio Huat v Wong Ted FuiFederal Court gives the right to the respondent to choose either action when the housing developer failed to deliver his deliver the house in according with to the time they had agreed. In facts on the case, the respondent had decided to continue the contract regarding of the breaching of the contract and conduct it by allowing the delivery dates to pass. But the respondent required extra work to be done by the housing developer. So, as the respondent wish to continue the contract, the time is no longer important.

Effect of rescission Section 40 of Contracts Act 1950 has stated

the aftermath caused by the refusal of a party to comply or perform the contract. It says that ‘When a party to a contract has refused to perform, or disabled himself from performing, his promise in its entirety, the promise may put an end to the contract, unless he has signed, by words or conduct, his acquiescence in its continuance.

Choo Yin Loo v Visuvalingam PillayIt was held that due to the failure of performance of the contract, the other party of the contract is entitled in repudiating the contract and claim for rescission.

Section 54 of Contracts Act 1950 can or should be read together with Section 76 of Contracts Act 1950 where both of the provision explains that any person who chooses to or rightly rescinds the contract is entitled for compensation causing from the damage by the failure a party to perform the contract.

Section 66 of the Contracts Act 1950 also explains the obligation of person who has obtained benefits from the contract that has become void. It states that, ‘When an agreement is discovered to be void, or when a contract becomes void, any person who has received any advantage under the agreement or contract is bound to restore it, or to make compensation for it, to the person from whom he received it’.

Rescission under the specific relief actStarting from Section 34 of the Specific Relief Act, it provides the circumstances which may determine or reject rescission:When rescission may be adjudged or refused.- (1) Any person interested in a contract may sue to have it rescinded, and such rescission may be adjudged by the court in any of the following cases, namely:- (a) where the contract is voidable or terminable by the plaintiff; (b) where the contract is unlawful for causes not apparent on its face and the defendant is more to blame than the plaintiff.

(c) where a decree for specific performance of a contract of sale, or of a contract to take a lease, has been made, and the purchaser or lessee makes default in payment of the purchase-money or other sums which the court has ordered him to pay.(2) When the purchaser or lessee is in possession of the subject matter, and the court finds that his possession is wrongful, the court may also order him to pay to the vendor or lessor the rents and profit, if any, received by him as possessor.

conclusion Rescission for breach occurs when there is a

repudiation or fundamental breach and at the same time the rights to elect to terminate the contract is given to the innocent party.

There must be a valid contract and serious breach that goes to the root of the contract for “rescission for breach” to occur

references Contract Law in Malaysia (Student Edition), Cheong May Fong

(2015)

Contracts Act 1950, International Law Book Services (2014)

Nicola Mallett (28 Feb 2012), Contractual remedies: the different outcomes of rescission and repudiatory breach, retrieved from http://www.lewissilkin.com/Journal/2012/February/Contractual-remedies-the-different-outcomes-of-rescission-and-repudiatory-breach.aspx#.VnNoKPl97IU.

Adam Vukovic (12-22-2014 11:16 AM) , Contract Rescission Lawyers, retrieved from http://www.legalmatch.com/law-library/article/contract-rescission-lawyers.html

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