THE LAW OF CONTRACT (PART II)

Terms of Contract (Conditions & Warranties)

Void & Voidable / Illegal Contract

Disharge by Frustration, Performance & Breach

TERMS OF A CONTRACT • A term is basically a statement which creates

contractual obligations between the parties.

• Any breach of the terms may result in the injured party being able to sue for damages.

 • Terms may be expressed or implied.

Express terms - those terms expressly stated in the contracts (whether written or oral).

 Implied terms - terms that the parties or courts may read ‘into’ the contract

• Terms may be implied by :-Custom and usage - pertaining to a particular type of

transactions;E.g. Trade custom would be assumed by the judge

to have included in the contract.

Statutory provisions;

The Courts - based on the intention of the parties.

• Terms may be classified as:

1. CONDITIONSThese are important terms of the contract. A breach of the conditions is fundamental. The

innocent party is entitled to terminate the contract and claim for damages.

E.g. the ship is “expected ready to lead” by a certain date / no dangerous or unlawful goods are to be shipped.

2. WARRANTIES A term considered by the parties to be of lesser

importance to the main purpose or intention of contract.

In the event of any breach, the innocent party must still perform their part of the contract. He is not entitled to terminate the contract.

However, he has the right to sue for damages for any loss that he may suffer as a result of that breach.

• It is important for parties to correctly identify which terms are to be conditions and which are to be warranties in order to establish the remedy available in case of breach of terms in the contract.

• Even though it is mentioned in the contract as a term or condition, the court will still have to determine the exact intention of the parties.

• 3. INNOMINATE TERMS (innominate = not having a name)

These terms may be fitted into the category of either conditions or warranties.

A breach of these terms could give rise to a fundamental breach in one situation, and in different situation, could give rise to minor breach.

Solution: Instead of classifying the terms as conditions or warranties, the innominate term approach looks to:The effect of breach, and The loss incurred the innocent party.

Would be a condition – if the breach would deprive the innocent party of substantially the whole benefit of the contract.

Would be a warranty – if the problem is capable of solution by the payment of damages.

Terms relating to a vessel’s description are usually treated as innominate terms.A term as to seaworthinessA term as to speed and consumptionA term as to ship’s carrying capacity

Landmark case: The Hong Kong Fir Shipping Company v Kawasaki Kisen Kaisha [1962] 2 QB 26 The problem was a main engine broke down The charterer withdrew from the charter due the

unseaworthiness of the ship which needs considerable time for repairs.

Held: Delays caused by the machinery repairs does not prevent the ship from completing her time charter commitment.

VOIDABLE CONTRACTS

• An agreement which is voidable at the option of the other party to the contract whose consent was not obtained freely, but caused by coercion, undue influence, fraud, misrepresentation or mistake.

• All agreements are contract only if they are made by the free consent of the parties. (Section 10)

• Consent is said to be free when it is not caused by one or more of the following: Coercion (s.15) – the threatening of an act forbidden by

the Penal Code & the unlawful detention of any property.

Undue influence (s. 16) – a person is in a position to dominate others and obtain an unfair advantage using that position.

Fraud(s17)- acts that are committed with intent to deceive another party or to induce him to enter into a contract.

Misrepresentation (s18)- false statement made by one party to the other party in which the maker of the statement believes that what he said is true.

Mistake (s21) mistake of fact. E.g. subject matter of contract is not in existence.

• When consent to an agreement is caused by coercion, fraud, or misrepresentation, the agreement is a contract voidable at the option of the party whose consent was so caused. [Section 19(1) ]

VOID OR ILLEGAL CONTRACTS• A void contract is an agreement that is not enforceable

by law (Section 2(g)

• An agreement which is unlawful is void. (Section 24)

• Agreements are void if any part of their considerations and objects are unlawful.(Section 25)

• When an agreement is discovered to be void, the person who received any advantage under such agreement or contract is bound to restore it to the other party or pay adequate compensation for the same –(section 66 )

• E.g. A promise to commit a crime in return for a money payment—is void. Neither party to a void “contract” may enforce it.

• Manang Lim Native Sdn Bhd v Manang Selaman (1986) 1 MLJ 379 Held: that an agreement made in contravention of a

statute (Sarawak Land Code) was entered into for an illegal consideration and was therefore a void agreement within the meaning of section 2(g) of the Contract Act 1950.

DIFFERENCE BETWEEN VOID AND VOIDABLE CONTRACT

VOID CONTRACT VOIDABLE CONTRACTCannot be enforced May be enforced at the option of the

‘innocent party’

DISCHARGE BY FRUSTRATION, PERFORMANCE & BREACH

• Discharge of a contract relates to the circumstances in which the contract is brought to an end.

• When a contract is discharged, the contracting parties are free from carrying out or performing their obligations under the contract

• A contract may be discharged by any of the following ways:- by Frustrationby Performanceby Breach

DISCHARGE BY FRUSTRATION

• Two supervening events that frustrate a contract:an event that makes the contract impossible of

performance, the event of supervening illegality. (Section 57(2)).

• Frustration should be subsequent to the formation of the contract.

• It should be some event which the promisor could not prevent.

• The contract may be discharged by subsequent impossibility in any of the following ways:-Destruction of subject matter;Objects of contract defeated;Death or personal incapacity;Supervening illegality.

•  Conditions for frustrationAn unforeseen event outside the control of the

contracting parties has significantly or radically changed the obligations of the parties from their original intention;

Neither party caused the supervening event;Neither party contemplated the supervening event, so

there was no provision in the contract for it; andThe new circumstances would make it unjust or unfair

to hold the parties to their original contract.

• The effect of a frustration: s 66The contract comes to an end automatically. Parties are released from any future obligations but any obligations that arise for the period that the contract is valid must be fulfilled

DISCHARGE BY PERFORMANCE• A contract becomes discharged through performance where

both parties have fully performed their contractual obligations. 

• Performance of a contract must be exact and precise and should be in accordance with what the parties had promised.

• Section 38 of the Contract Act provides that parties to a contract must either perform or offer to perform their respective promises, unless such performance has been dispensed with any law.

 • Section 51 – that the performance of any promise may be

made in the manner, or at any time, as agreed by the parties.  

DISCHARGE BY BREACH

• When a party fails to perform their obligations as agreed, they are in breach of contract. A breach can occur in some ways including:Failure to comply with a term of the contract;By a party announcing to the other party that they no

longer interested in carrying out their obligations prior to the time of performance (anticipatory breach); and

Delay in the performance where time is of the essence in the contract.

• A refusal to perform may occur before the time for performance is due (anticipatory breach), or during the time of performance itself.

Effect of Breach• The innocent party is entitled to treat the contract as ended

from the time of the terminating event and may be able to recover damages.

 • The innocent party must restore whatever benefits which he

may have received from the other party (section 65)

• If the innocent party has rendered services or supplied goods, he may recover a reasonable sum for such services or goods rendered. If the innocent party has paid money under the contract, he may be entitled to recover the sum paid.

DISCHARGED BY AGREEMENT BETWEEN PARTIES (Section 63 and 64)

 • A contract can be terminated by mutual agreement

between the contracting parties. All parties must consented to end the contract.

REMEDIES1. Damages (s.74)–

is granted to an injured party as a monetary compensation for the damage, loss or injury he has suffered through a breach of contract.

May be liquidated (the amount to be recovered is prescribed in the contract) or unliquidated damages.

E.g. for unliquidated damages – demurage.

Purpose: is to enable the innocent party to receive monetary compensation from the party responsible for the breach of contract.

See Illustrations in s. 74

2. Specific performancea discretionary remedy granted by the Court. It’s a direction by the Court to carry out certain

obligations under the contract. It’s generally not used in a breach of contract actions

unless damages proved to be inadequate. Is provided under Specific Relief Act 1950

3. Injunctiona court order restraining a party from breaking their

contract or from committing a wrongful act.

References

• Lee, M. P. (1990). General principles of Malaysian law. Fajar Bakti.

• Alsagoff, A. S., & Alsagoff, A. S. (1996). Principles of the Law of Contract in Malaysia. LexisNexis

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