The High Court held that when the fundamental terms of a contract had been breached, the party not in default can allow the party in default to perform beyond the agreed time and within a reasonable time. The party in default can later treat the contract as being breached if promises were not kept. Thereupon, the cause of action accrues.
Facts of the Case
Respondent owns 5 pieces of leasehold land held under 5 separate titles. Respondent developed the lands into bungalow plots through a joint venture with MBSB Development Sdn Bhd (“MBSB”). By a sale and purchase agreement (“SPA”) dated 20 October 1999, the appellants purchase 2 bungalow plots of land from the respondent. The material terms are:
Appellant shall pay the purchase sum of RM53,040 for each plot by way of 95 monthly instalments of RM532 per month to the respondent with a final instalment of RM500.
A registration fees of RM2,000 paid by the appellants shall be treated as part payment towards the purchase price.
Respondent shall let the appellants into vacant possession of the plot upon completion of the basic infrastructure works which shall not be later than 36 months from the date of signing of the SPA.
The delivery of vacant possession is subject to the appellants having paid all the instalments to the respondent up to the date of all the instalments to the stage of completion of the basic infrastructure works.
In the event that the said plots are not completed and ready for delivery of vacant possession by the completion date, the respondent shall pay to the appellants liquidated damages calculated from day to day at the rate of 8% per annum on the purchase price of the said plot from the due date of basic infrastructure completion date to the date of completion of basic infrastructure.
Respondent shall use its best efforts to obtain as expeditiously as possible the issue of the separate qualified document of title and upon such issuance, and subject to full payment, the respondent shall within 21 days execute a memorandum of transfer of the plots in favour of the appellant.
The appellant claimed that they have fully paid the purchase price with the last instalment paid on 21 November 2007 and had repeatedly demanded for vacant possession but it was not delivered. On 8 July 2007, the appellant had issued a notice to the respondent through their solicitors to rescind the SPA and request a refund of the sum of RM106,080 paid with interest at 5% in total amount of RM40,366 in damages. The respondent did not reply. Thus, appellants filed a suit in the Sessions Court.
The respondent in their defence said that he was a victim and suffered losses following MBSB’s failure to perform the obligations under their joint venture agreement, the monthly instalments paid by the appellant was paid to the project account of MBSB and appellant’s claim was time-barred since cause of action arose on 20 October 2002 when respondent allegedly had to deliver vacant possession.
The Session Court held that it is the respondent’s responsibility as vendor to perform all its obligation under the SPA including to deliver vacant possession but appellant’s right to sue accrued on 20 October 2002 which was the date vacant possession should be delivered. Thus, the appellant’s claim was dismissed for being time-barred by section 6(1)(a) of the Limitation Act 1953 (“LA 1953”).
Issue of the Case
Whether the appellant’s claim is time-barred by section 6(1)(a) of the Limitation Act 1953?
Judgment of the Case
The appellants submit that the Session Court Judge (“SCJ”) erred in law and in fact when she failed to understand the cause of action as pleaded namely that the respondent did not comply with the terms of the SPA by failing to give vacant possession of the said plots or to transfer the same to the appellants despite the fact that full payment has been made by the appellants and found that the appellants’ claim was time-barred.
Appellants submit that their claim was a claim for return of monies paid due to non-performance by the respondent. They had treated the contract as still subsisting when they continued to pay the monthly instalments toward the purchase price even after the expiry of 36 months until 27 November 2007 when the full sum was paid. The period of limitation only begins to run when the appellants decide to terminate or rescind the SPA on 8 July 2013. Hence, this suit filed on 11 June 2014 was within the 6 years limitation period.
Respondent argued that the appellant’s primary complaint is that the respondent failed to deliver vacant possession on 20 October 2002 which was 36 months from the date of the SPA. Therefore, time starts to run from the date of breach and the appellant’s cause of action expired on 20 October 2008.
Under section 6(1)(a) of the LA 1953, the limitation period for an action of contract is 6 years from the cause of action accrued. The SCJ in her judgment held that the plaintiffs had repudiate their SPA. Although the plaintiff’s solicitor letter to the defendant dated 8 July 2013 mentioned 2 different terms, i.e. rescind (pembatalan) and repudiation (penamatan) of the contract, the SCJ held that these two terms carried different meaning and effect. It was explained by the SCJ as follows:
“70. Di dalam undang-undang kontrak, terma “rescind” atau “repudiate” adalah membawa maksud dan kesan yang berbeza. Bagi penamatan kontrak atau “repudiation” (seksyen 40 Akta Kontrak 1950), sesuatu penamatan itu berlaku apabila sesuatu pihak tidak mahu lagi menjalankan obligasi di dalam perjanjian dan ianya adalah “voidable at the option of the promisee”. Manakala “rescindment” atau pembatalan kontrak (seksyen 65 Akta Kontrak 1950) adalah apabila sesuatu pihak membatalkan sesuatu perjanjian atas sebab contohnya terdapat salah nyata (misrepresentation) atau kesilapan (mistake) dan sebagainya. Kesannya adalah “void ab initio” seolah-olah kontrak tersebut tidak wujud. Mahkamah ini telah merujuk kepada kes Mahkamah Persekutuan iaitu Berjaya Times Squares Sdn Bhd (formerly known as Berjaya Ditan Sdn Bhd) v. M Concept Sdn Bhd [2010] 1 MLJ 597 …
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Berdasarkan otoriti diatas, ianya jelas menerangkan bahawa pembatalan kontrak (rescind) dan penamatan kontrak (repudiate) membawa maksud dan kesan yang berbeza. Pihak Plaintif-plaintif telah menggunakan kedua-dua perkataan ini di mana di dalam pliding, pihak Plaintif-Plaintif menyatakan penamatan kontrak (repudiation) berdasarkan surat peguamcara Plaintif-plaintif bertarikh 8.07.2013 … namun kandungan surat tersebut menyatakan sebaliknya iaitu telah dinyatakan pembatalan kontrak (rescind).”
“Repudiation” means to put an end to an agreement when one of the parties refuse or become unable to fulfil its obligation and it is voidable at the option of the promise. In contrast, “rescindment” means to nullify or to cancel the agreement on the grounds such as misrepresentation and mistake. The effect of the agreement would be void ab initio or treating the agreement as if it had not existed.
The High Court held that the word “recession” is correctly translate as “pembatalan” but the word “repudiation” is more accurate translation would be “penolakan”. It was held that the finding and reasoning of the SCJ is flawed.
Firstly, section 40 of the Contracts Act 1950 (“CA 1950”) provides that when a party to a contract has refused to perform or disabled himself from performing his promise in its entirety, the innocent party may put an end to the contract unless he has signified, by words or conduct, his acquiescence in its continuance. In Tan Kok Siang v Kemuning Setia Sdn Bhd [2018] 8 CLJ 546; [2018] 6 MLJ 652, the Court of Appeal explained that a contract is not automatically brought to an end by a repudiatory breach. The right to terminate or rescind a contract is not available in every case of repudiation. That right is dependent on inter alia, the nature of the term breached and the conduct of the parties. If the term breached is fundamental to the contract, the innocent party is entitled to treat himself as being discharged from further obligation under it.
The approach to determine whether a term is fundamental or subsidiary is to look at the consequences of the breach of the term in question. If the breach is of such a nature that it goes to the root of the contract, then the term broken is fundamental in nature. On the other hand, if the consequences of the breach complained of are not serious in the sense that they do not go to the root of the contract, then the term in question is a subsidiary one entitling the innocent party to recover damages but not to treat the contract as being at an end.
Secondly, an act of rescission could also arise where the innocent party chose to end the contract and treats himself as being discharged from further obligation under the consequences of the other party refusing to perform or disabling himself from performing a fundamental term to the contract.
Thirdly, the parties had expressly stipulated that time shall be the essence of the contract. Section 56(1) of the CA 1950 states thatwhere time is of the essence of the contract, failure to perform within the stipulated time will entitle the injured party to elect whether to insist on performance of the contract and sue for damages or to bring the contract to an end.
In Sim Chio Huat v Wong Ted Fui [1983] 1 CLJ 178, the Federal Court held that:
“In modern law of contract prima facie a stipulation as to time is not of the essence of a contract, unless the parties agree that it be so.
... If in a contract in which time is of the essence, a party fails 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 exists but time ceases to be of the essence and becomes at large. Consequently, he cannot claim the liquidated damages under the contract unless there is a provision as to the extension of time. However, this cessation can be revived and so time can be restored to be of the essence by the innocent party serving a notice to the party in default giving a new date of completion.”
In Ganam Rajamany v. Somoo Sinniah [1984] 2 CLJ 268, the Federal Court held that time fixed by the parties for completion or performance is not to be strictly construed unless it is the intention of the parties that time should be of the essence of the contract. Intention may be express or implied.
Fourthly, to determine whether there has been a total failure of consideration, the court must interpret the promise as a whole and then view the performance of the promise from the perspective of the party in default. The test to be applied is whether the party in default has failed to perform his promise in its entirety. (TTDI Jaya Sdn Bhd v. Yew Hong Teng & Anor [2017] 1 CLJ 436; KLC Placement Services Sdn Bhd & Anor v. Balakrishna Polanaido [2014] 1 LNS 1108; Mok Yii Chek v. Sovo Sdn Bhd & Ors [2015] 1 LNS 448)
The Court held that the error in the SCJ’s reasoning and failure to recognise the appellant’s cause of action had impacted the finding to the issue of limitation period. The appellants’ submission after the trial had made clear that they are not claiming for vacant possession or damages for late delivery but they are exercising their right to accept the respondent’s breach and rescind the contract. They sought for a refund of the purchase price paid to the respondent with interest and costs due to the respondent’s total failure of consideration on their part.
There is a contradiction in the term of the SPA but the appellants could take the stand that they are entitled to vacant possession of the said plots only upon full payment of all 96 monthly instalments. Although the SPA had provided that the time shall be the essence of the contract, the fact that the appellants continued to make payments toward the purchase price despite not having vacant possession to the said plots within 36 months from the date of SPA shows that the appellant treated the contract as still subsisting but time ceased to be of the essence of the contract. There was no correspondence between 20 October 2002 and 7 July 2013 disclosed which could have amounted to a notice fixing a reasonable time for performance.
In Sime Hok Sdn Bhd v Soh Poh Sheng [2013] 2 CLJ 615, the Court referred to the decisions in Hock Huat Iron Foundry v Naga Tembaga Sdn Bhd [1999] 1 CLJ 89; [1999] 1 MLJ 65 and Damansara Realty Bhd v Bungsar Hill Holdings Sdn Bhd & Anor [2011] 9 CLJ 257; [2011] 6 MLJ 464 and said that:
“[14] The long and short of it, as held and observed in Hock Huat Iron Foundry, is that where a party not in default does not rescind a contract under s. 56(1) of the Contracts Act 1950 but allows the party in default to complete the work beyond the completion date, then time is no longer of the essence of the contract, and that when time is at large, the promisor must perform the promise within a reasonable time as provided under s. 47 of the Act, and if there is unreasonable delay the party not in default may give a notice fixing a reasonable time for performance after the expiration of which the party not in default would treat the contract as at an end (rephrased from Law of Contract in Malaysia by A Mohaimin Ayus at p 20). Again, it was not held, only that time by the Court of Appeal, that a notice fixing a reasonable time for performance is required before breach of a promise in which time for performance is not specified could crystallise. Indeed, we were not shown any authority that ruled that such notice is essential before breach could occur. Rather, to the contrary, there is a decision of this court, namely Damansara Realty Bhd v. Bungsar Hill Holdings Sdn Bhd & Anor [2012] 1 AMCR193; [2011] 6 MLJ 464, that could not but only point that breach occurs after the expiration of reasonable time for performance.
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[16] In relation to the third question, the Federal Court held that in commercial contracts, time is of the essence, that even if time were at large, there was still a duty on the plaintiff to commence work within a reasonable time, and as the plaintiff had failed to commence any development activity, the plaintiff was in breach of the PDA which justified termination. ...
[17] There was no notice fixing time for performance in Damansara Realty Bhd. Yet it was held by the Federal Court that there was a breach of the PDA when the plaintiff failed to commence development within a reasonable time. In other words, under s 47, a prior notice fixing time for performance is not a precursor to breach.”
Respondent did not produce any evidence to show the land has been subdivided or that a memorandum of transfer had been executed after all these years. The respondent had clearly breached the material terms of the SPA but the appellants choose to accept the repudiation and only treat the SPA as at an end when they directed their solicitor to send the letter on 8 July 2013 to the respondent. In these circumstances, a reasonable time for performance by the respondent’s promise ended when the appellants sent the letter and treated the SPA being breached by the respondent. Thus, the cause of action only accrues from 8 July 2013 and was not time-barred.
In conclusion, the appellants’ appeal was allowed with costs.
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