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Discharge by Performance

Outline
1.
2.
3.
4.
5.
6.
7.
8.

Performance must be complete;


Entire and divisible contracts;
Doctrine of substantial performance;
Partial performance and Quantum Meruit;
Performance prevented;
Time for performance;
Time of the essence of the contract;
Effect of failure to perform under section 56 of the Contracts
Act;
9. Waiver of right that time is of the essence.

Performance must be complete

The general rule in contractual relations is that performance


must be exact and precise and in accordance with what the
parties have agreed. The parties are discharged form the
contract once they have fully performed their respective
obligations. However, in practice, performance is often less
than perfect and consequently, a breach of contract arises.

The innocent party will insist on not paying until


performance is complete or may wish to claim for losses
suffered as a result of the breach of contract, form his point
of view in any event. On the other hand, the party who has
not fully performed will want to be paid for the fruits of his
labour, imperfect though it may be. Thus performance and
breach are inter-related.

Section 38(1) of the Contracts 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.

Entire and Divisible Contracts

To ease the rigorours of the strict requirement of exact and


complete performance before payment, a distinction has been
made between entire and divisible contracts. In contracts of
employment, for instance, payments may be made at weekly
or monthly intervals and this would have avoided the nonpayment of performance that occurred in Cutter v. Powell, at
least for every completed week or month. Similarly, in building
contracts, it is usual to provide for payment at intervals,
usually against an architects certificate.

In an entire contract, complete performance is a prerequisite


for payment. Whether the contract is a divisible contract or an
entire is dependent on the intention of the parties to the
contract. In Tong Aik (Far East) v. Eastern Minerals &
Trading, the plaintiffs claimed the balance due to them from
the defendants as their agreed remuneration under a
contract for work and labour carried out and materials
supplied at the defendants manganese mine. The
defendants denied liability on the ground that this was an
entire contract and that the plaintiffs

were in breach of the contract as they did not supply the


defendants with the manganese ore as stipulated in the
contract. The defendants claimed to set off various sums said
to be due to them and counterclaimed for loss of profits and
penalties incurred by them as a result of plaintiff's breach. The
High Court of Singapore construed the contract and held that it
was a divisible contract as the parties did not intend the
contract to be fulfilled as a whole.

at in this way it does not seem to me that this is a contract


which was intended to be fulfilled only as a whole. It possess
more of the characteristics of a divisible contract to be fulfilled
in parts.

An entire contract is also known as a lump sum


contract the consideration being in a lump sum
payable on complete performance. Full and exact
performance is a condition precedent to performance in
entire contracts. On the other hand, a divisible contract
is separable into parts and is payable as each part is
performed.

Doctrine of Substantial Performance

The doctrine of substantial performance enables a party


who has performed substantially his obligations
under the contract (although not the exact and literal
performance) to make a claim for payment. This
doctrine is applicable even if the contract is an entire
contract. What is necessary is that a substantial part of the
contract has been performed. The part unperformed must be
only a small proportion to the whole contract. It can be said
that the doctrine of substantial performance applies the
principle de minimis non curat lex (the law does not concern
itself with trifles).

If the doctrine is applicable, party has the right to


claim for payment of the stipulated price subject only
to a cross-claim or a counter-claim by the other party
for the omission and defects due to the failure to
perform the contract completely. The application of the
doctrine depends on the facts of the case and can be
excluded by the clear intentions of the parties. In deciding

consideration must be given to: (i) the nature of the


defects; and (ii) the proportion between the cost of
rectifying such defects and the contract price.

If the doctrine is applicable, party has the right to claim for


payment of the stipulated price subject only to a cross-claim
or a counter-claim by the other party for the omission and
defects due to the failure to perform the contract
completely. The application of the doctrine depends on the
facts of the case and can be excluded by the clear intentions
of the parties in deciding whether a contract has been
substantially performed.

In Building & Estates Ltd. v. Connor, the plaintiff claimed


from the defendant the unpaid purchase money in respect of
a house which the plaintiffs built for the defendant. The
defendant into occupation of the house but refused
to pay the balance of the purchase price on the
ground that it was not built according to specification
and that much of the works were defective and of
inferior quality.

The High Court held that the doctrine of substantial


performance applied in the present case:

the plaintiff are entitled to sue the defendant for


the contract price, on the basis that they can show
that the work which they have done constitutes
substantial compliance with the contract The
defects and omissions of which complaint is made by
the defendant relate to a number of miscellaneous
items many of them trivial are of only minor
importance I am in no doubt that the defects and
omissions which have been proved, whether taken singly or
in the aggregate, are not such as to entitle the defendant to
say that the plaintiffs have not substantially performed their
promise under this contract.

In KP Kunchi Raman v. Goh Bros Sdn. Bhd., the High


Court held that the agreement was an entire contract and
the doctrine of substantial performance had not be excluded
by an express provision in the said agreement.

The High Court held that the plaintiff had substantially


performed is obligations under the contract after
considering the nature of the defects, the cost of
rectifying them and the balance of the work left undone.

Partial performance and Quantum


Meruit
There may be situations that the incomplete performance
does not amount to substantial performance. In such cases
of partial performance, the party who had rendered services
or supplied goods may make a quantum meruit or quantum
valebant claim respectively.

A claim on quantum meruit is for reasonable remuneration


for the performance of the services rendered under the
contract. It is often assessed at the market price which is
payable to obtain similar services.

Historically, a claim for quantum meruit rested in implied


contract. It is said there must be an implicit promise by the
defendant to pay for the part performance. Further, the
defendant must have a choice whether to accept or reject
the work done. It may be also possible to infer from the
circumstances a fresh agreement by the parties that
payment shall be made for the work already done.

In Haji Hasnan v. Tan Ah Kian, the appellant having


obtained a contract to construct roads, subcontracted with
the respondent for its performance. The appellant inspected
the work and found that it was not properly done. The
appellant terminated the contract before the work was
completed without giving notice to the respondent. He
immediately entered into a fresh contract with another
person for the completion of the work. The respondent
requested an extension of time to compete the work and
when it was not granted, brought an action for the work
done and materials supplied.

The Court of Appeal held that the appellant was in


breach of contract and the respondent was entitled to
recover on the basis of quantum meruit. From the
circumstances, the Court of Appeal held that there was an
implied contract on the part of the appellant to pay for the
work and labour done and materials supplied.

While the claim for quantum meruit arose historically from the
basis of an implied contract, a quantum meruit claim is now
also recognized as a claim in restitution, an obligation
imposed by law without any reference to any promise or
agreement. In Kejuruteraan Elektrik Usahamaju Sdn. Bhd.
v. Zilatmas (M) Sdn. Bhd., the High Court held that it is
heartening to note that in the event the contract is
unenforceable in law, the builder may still recover by way of
restitution.

The position that quantum meruit claims can arise in both


contract and resitution has been recognised by the Malaysian
courts. In Hasbullah Chan & Associates Architect v.
Rahika Development Sdn. Bhd.

In Mott Macdonald (Malaysia) Sdn. Bhd., v. Hock Der


Realty Sdn, Bhd., Abdul Malik Ishak J referred to a passage on
quantum meruit as follows:
The remedy of quantum meruit exist in two distinct
settings. In a contractual setting, remuneration is said to
be paid on quantum meruit basis when, although a valid
contract is found to exist in fact and law, there is no
clause spelling out in express terms the consideration for
the contract. In such circumstances, the Courts award
reasonable remuneration to the person who has rendered
the services. In an unjust enrichment setting, an action
for quantum meruit is based, in general, upon the
rendering of services by one person to another who has
requested such services be rendered or freely accepted
them with the knowledge that they are not rendered
gratuitously.
In relation to the Contract Act, three provisions that may apply
for recovery of benefits which is akin to a quantum meruit claim
are ss65, 66 and 71.

Section 65 of the Contracts Act provides for a party


rescinding a voidable contract to restore any benefit that he
has received form another party to the contract. Some of the
illustrations in s66 of the Contract Act which applies to
restoration of benefits received under a void agreement and
contract becomes void appear to be instances of s65
situations.

Illustration (b) is a situation of rescission of a voidable


contract for breach, wherein A in breach of contract delivers
to B only 130 gantangs or rice instead of the agreed 250
gantangs. Similarly, in Illustration (c), the singer A who has
sung for the previous five nights before she willfully
absented herself form the theater resulting in B, the
manager of the theater rescind the contract, is entitled to be
paid for the five nights she had sung. The former claim is
akin to a quantum valebant and while the latter, a claim in
quantum meruit.

Quantum valebant differs from quantum meruit in


that quantum meruit is used to recover the
reasonable value of services rendered, while quantum

It has been opined in Yee Hoong Loong Corp Sdn. Bhd. v.


Kwong Fook Seng Co., that reasonable compensation
granted by the courts for any benefit obtained and given
under a contract by any party when the contract is found to
be void under s66 of the Contracts Act would be the same as
quantum meruit since the latter expression is just a name
of a remedy for reasonable compensation used in various
contracts.

Section 71 of the Contracts Act provides for obligations of


person enjoying the benefit of a gratuitous act. Thus, as long
as the act done or the thing delivered is (i) lawful, (ii) done
for another person which was not be intended to be done
gratuitously and (iii) the other person enjoys the benefits of
the act or delivery, s71 of the Contracts Act imposes on the
recipient of the benefit to make compensation to the other
party giving such benefit.

Performance prevented

If a party to a contract performs part of the work that he has


undertaken and is then prevented by the fault of the other
party from proceeding further, the law does not deprive him
of the fruits of his labour. He is entitled to recover damages
for breach of contract, but alternatively, he can recover
reasonable remuneration on a quantum meruit basis for the
performance he has rendered.

In Smith Construction CO. Ltd v. Phit Kirivatna, the


plaintiffs were employed as contractors to build a house for
the defendant. As a result of information given by the
defendant to the plaintiffs representative, the house was
built so as to partly encroach upon adjoining land. The
plaintiffs were asked by the defendant to slow down in their
works while the defendant was negotiating a settlement with
the owner of the encroached land. The High Court held that
there should be an implied contract by the defendant to pay
for the work done. The plaintiffs were entitled to recover the
full amount of the work and labour done and materials
supplied, together with such

additional damages as hey had suffered by reason of the


slowing down and stoppage of the work.

In this case, the High Court was referred to an established


principle set out in Emden on Building Contracts (4 th edition) at
page 113 as follows:
It is a rule of law, which was established and well understood
200 years ago, and is laid down in Com Dig that performance
of a condition shall be excused by the obstruction of the
obligee, as if a condition be to build a house, and he, or other
by his order, hinders his coming upon the land, or says that it
shall not be built, or interrupts the performance. If after part
performance of the work, the completion be refused or
prevented by the employer, the builder may insist upon his
rights under the contract, or claim damages without
completion, and he will be entitled to recover what he lost by
the act of the defendant.

Time for performance

Most contracts contain provisions as to the time for


performance and provide for the completion dates. Where
no time for performance is specified, s47 of the
Contract Act provides that the engagement must be
performed within a reasonable time.

In Penang Development Corp. v. Khaw Chin Boo &


Anor, the plaintiffs claimed for damages for late delivery of
vacant possession of a flat which they had purchased from
the defendants. The sale and purchase agreement was silent
regarding the date for delivery of vacant possession and, in
this case, possession was given more than three and a half
years after the execution of the agreement. The plaintiffs
contended that vacant possession must be delivered within
a reasonable time.

Mohamed Dzaiddin J stated:


First, it is common ground that the written agreement did not
fix any time for the performance of the contract. So when no
time is specified, the contract must be preformed within a
reasonable time
- s47 Contracts Act 1950. What is a
reasonable time is, in each particular case, a question of fact.
However, the plaintiff cannot arbitrarily fix the time. It must be
reasonable having regard to the state of things at the time
when notice was given

In my opinion, a written notice giving time to complete the


delivery is necessary since time by which the contract was to
be completed has not been stipulated, nor made the essence
of the contract ...
In this case, however, the plaintiffs claim failed on a matter of
pleading as they had not pleaded the vital issue of notice to the
defendant to complete delivery of vacant position within a
reasonable time.

In Hassan v. Ismail, the defendant agreed to sell a portion


of a piece of land to the plaintiff, the defendant undertaking
to execute the transfer as soon as the land is subdivided by
the Government. The defendant failed to subdivide the land
and transfer it to the plaintiff and the plaintiff sued for
specific performance. After referring to s47 of the Contracts
Act, the Federal Court held that:
the engagement to apply for subdivision must be
performed within a reasonable time and considering the time
lapse the defendant had failed to do so

In Nyap Kui Fah v. Len On Contractor, although there


was no reference to s47 of the Contracts Act, the Federal
Court was of the view that where no time was set for the
performance of the contract, the law implied that
performance must be completed within a reasonable time
having regard to the circumstances.

Time of the essence of the contract

Besides a clause fixing time for performance, most contracts


would also have a clause that time is the essence of the
contract. This means that the mater of time is important and
vital to the contract.

In Tan Ah Kian v. Haji Hasnan, Gill J set out three


situations where time is considered to be of the
essence of the contract:
1. The parties state in the contract that time is of the
essence of the contract.
2. If this is not stated in the contract, any party may give a
reasonable notice to make time as of the essence of the
contract to the other party who has failed to perform the
contract within a fixed time.
3. Through the nature or content of the contract, time should
be deemed as of the essence of the contract.

Where time has been stipulated in an agreement to be of


the essence, it is of primary importance that the time
stipulations must be adhered to. If the parties have omitted
in the contract, time can still be made of the essence.

In Mensa Mercantile (Far East) Pte. Ltd. v. Ekobina (M)


Sdn. Bhd., the High Court held that where time was not
originally of the essence of the contract, time can
only be made of the essence by one party giving
notice to the other subject to two requirements: (i)
the other party has been guilty of unreasonable delay; and
(ii) the time mentioned in the notice must be reasonable.

(iii) to apply to court to hold that time should be deemed as


of the essence of the contract having considered the nature
or content of the contract. In Associated Pan Malaysia
Cement Sdn. Bhd. v. Syarikat Teknikal & Kejuruteraan
Sdn. Bhd., the Supreme Court had to decide whether the
time provided to make payment for the extraction of rock
material in this case was of the essence of the contract.

The court held that the intention of the parties as to whether


time is of the essence of the contract must be construed
from the
instrument itself together with surrounding
circumstances. The provisions, nature and subject matter of
the said contract must also be considered.

In this case, clause 7.1 of the contract provided that


payment will be made to the contractor before the
tenth working day of the following month. Counsel
for the respondent submitted that the surrounding
circumstances of the contract also indicated that time
for payment was of the essence due to two factors,
namely; (i) the term for payment was reduced from
15 days in the first contract between the parties to 10
days in a subsequent contract; and (ii) the
respondent was dependent on those payments to pay
his creditors and his workers who had to be paid by
the seventh day of the month. After construing the
contract as a whole, the Supreme Court held that the for
payment was of the essence in this case.

In Mohd Said Hasan Kamouna v. Ferrari (M) Sdn. Bhd.,


the High Court applied the concept of collateral contract to
make time of the essence of the contract for the delivery of
two cars purchased. The court held that the assurance given
by the defendant's then-director to the plaintiff that that the
cars will be delivered within the specified time stipulated in
the agreements or within a reasonable time, constituted a
separate agreement which existed side by side with the
principal agreements.

The Court ordered that the plaintiff was entitled to a refund


of the deposit if no stock of the cars were available after 18
months form the date of down payment of the deposit.

Effect of failure
Contracts Act

to

perform

under

s56

Section 56 of the Contracts Act provides for the effect of


failure to perform at a fixed time stipulated in a contract. In
the Federal Court decision of Sim Chio Huat v. Wong Ted
Fui, Salleh Abas FJ stated the position of s56 of the
Contracts Act as follows:

However, the rule contained in section 56 of the Contract Act


are not different from the position arrived at in common law
The position is this: 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 is as till 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 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

Under s56(1) of the Contracts Act, if time is of the


essence of the agreement, a failure to perform within
the time fixed will gave the innocent party option
whether to put an end to the contract. The cases that
have been decided under s56(1) are often cases of breach
by property developers who fail to deliver vacant possession
by the completion date where time is of the essence of the
contract. In such cases, the courts have held that the
contract is voidable and the plaintiff/purchaser is entitled to
terminate the agreement.

In Chye Fook & Anor The Teng Seng Realty Sdn. Bhd.,
the High Court held that the plaintiff had a right to rescind
the contract where time was of the essence. The Court also
stated by way of obiter that under s76 of the Contract
Act, a party who rightly rescinds a contract is entitled
to compensation for any damage which he has
sustained through the non-fufillment of the contract.

It must be emphasised that the right to rescind applies only


when time is of the essence of the contract. The existence of
a completion date for a contract does not automatically
mean that time is of essence of the contract. This appear to
be the error of the plaintiff/vendor in Ganam d/o Rajamany
v. Somoo s/o Sinniah, who purported to rescind the sale
and purchase agreement for land on the ground that the
defendant/purchaser had failed to pay the balance purchase
price on the due date or a reasonable time thereafter.

The Federal Court considered the principles regarding time


in Tan Ah Kians case discussed earlier and on the facts,
held that it was not the intention of the parties to make time
of the essence. Thus, the unilateral act of the plaintiff un
purporting to rescind the contract was wrong in law and did
not put an end to the contract between the parties.

Where the parties have not made time the essence of the
contract, then s56(2) of the Contracts Act applies. In this
situation, a failure to perform at the time specified does not
make the contract voidable but the promisee is only entitled

compensation from the promisor for any loss occasioned to


him by the failure to perform. If there is a liquidated
damages clause, the provision of the clause apply; otherwise
an assessment of the losses suffered will be made following
s74 of the Contracts Act.

Where the parties have made time of the essence of


the contract, the innocent parties has the choice not
to avoid the contract but to insist on performance
and sue for damages. In this situation, s56(3) of the
Contracts Act applies. Under s56(3), if the innocent
party accepts performance despite the promisors
failure to perform at the agreed time (that is, there is
already a breach of contract), at the time of
acceptance, he will have to give notice to the
promisor of his intention to claim compensation. This
notice has to be given when the promise agrees to
extend time.

According to Abdul Aziz J in Sakinas Sdn. Bhd. v. Siew Yik


Hau & Anor, the words at any time other than that

been delayed but is now completed and the promisee now,


at a time later than the agreed time, accepts the
performance. According to his lordship, if that were so, the
notice cannot be of any practical use to the promisor except
to know that there is a claim against him and to be ready
with the money. On the other hand, an earlier notice of a
claim for compensation will enable him to come to a
commercial decision whether it is viable for him to go on
performing if he is going to have to pay compensation.

The effect of s56(3) of the Contracts Act was considered by


the Privy Council in Yeow Kim Pong Realty Ltd. v. Ng
Kim Pong. In this case, there was a sale and purchase
agreement of a piece of land where a sum of $24,000 was to
be paid before 28 June 1956 by the plaintiff/respondent. The
respondent failed to make the payment. The respondent
requested for an extension of time to pay and this was
agreed to by the appellant provided that certain conditions
as laid out in a supplementary agreement were satisfied.
Thus, there was an acceptance of delayed performance
when the appellant gave the extension of time to pay and

However, when the respondent also failed to satisfy the


conditions in the supplementary agreement, the appellant
rescinded the contract on 1 September 1956. The Privy
Council held that the agreement was rightfully rescinded. In
relation to the supplementary agreement, the Privy Council
reversed the decision of the Court of Appeal which held that
the agreement was contrary to law.

Waiver of right that time is of the essence

Even if time is of the essence of the contract, this


provision may be waived by the conduct of the
parties. This can happen in situations where the
parties continue to negotiate even after the time
fixed for performance.

Sharikat Eastern Plastics Industry v. Sharikat Lam


Seng Trading illustrates the principle that when time is of
the essence of the contract, the stipulation as to time may
be waived by indulging in further negotiation. In this case,
the contract of sale to deliver certain machines stipulated
that shipment should be during July 1968 and delivery in
August 1968. However, up to
September 1968,
negotiations were still going on between the parties
regarding the date of shipment and delivery of the
machinery and also the model of the machinery to be
delivered. The High Court held that the parties by their
conduct had waived the stimulated as to time. If the
plaintiffs had wanted to make time to be again of the
essence, then they must give a notice to the defendants to

Mohamed Azmi J stated:


By indulging in further negotiations they [the plaintiffs] have,
in my view, waived the stipulation as to time. The stipulated time
having been waived, the time became at large and that
thereupon the defendants only obligation was to deliver within
reasonable time. In my opinion, what is a reasonable time is a
question of fact to be decided on the circumstances of each case
In my view, when time is no longer the essence of the
contract, one and a half months cannot constitute delay on the
part of the defendants in the face of the unchallenged evidence
of D.W.2 that it would normally take two to three months to
assemble such machines I, therefore, find that the defendants
have not committed a breach of contract for non-delivery of the
machinery .

If the completion date has expired and the party takes too
long to act to act, then the party has waived his right that
time is of essence of the contract. In Sim Chio Huat v.
Wong Ted Fui, the Federal Court held that the respondent
by allowing the delivery date to pass and by acquiescing in
the work continuing under the agreement, had waived the
stipulation that time is of the essence of the agreement.

In Cheah Khoon Tee v. Crimson Development Sdn.


Bhd., the plaintiff only terminated a sale and purchase
agreement 18 months after the right to terminate arose.
The High Court held that the plaintiff had waived the
right to rely on time being of the essence of the
contract and thus, was estopped from terminating or
rescinding the agreement.

In Quah Ban Poh v. Dragon Garden Pte Ltd., the High


Court accepted the evidence which showed that the
defendants had waived time being the essence of the
agreement by allowing the time of payment for the last
installment to pass. The effect of the waiver of time being
the essence of the agreement was that time became at

contract again, they should have given the plaintiff a notice


fixing a reasonable time within which he must pay the last
installment. What is a reasonable time is a question of fact
to be decided on the circumstances of each case. As the
defendant in this case had not given the plaintiff any
reasonable notice at all in its solicitors letter to make time
again the essence of the contract, the said agreement was
therefore not validly terminated.

In Wong Kup Sing v. Jeram Rubber Estate Ltd., the High


Court held that time was no longer of the essence by the
parties continued negotiation. The notice given by the
defendants was insufficient; thus, the contract was never
terminated. In this case, the plaintiff entered into an
agreement with the defendants for the purchase of a rubber
estate. Under the agreement, time was of the essence of the
contract but at the request of the plaintiff, the defendants
extended the time for completion of the sale on six separate
occasions. Eventually, the defendants informed the plaintiff
that the purchase should completed on a certain date. The
plaintiff did not complete the purchase on that day and the
defendants terminated the contract.

Wong Kup Sings case was distinguished in Siah Kwee Mow


v. Kulim Rubber Plantation where there was only one
extension of time. In this case, the plaintiffs agreed to
purchase a rubber estate for $3 million. They paid a sum of
$300,000 by way of deposit and part payment. Clause 4 of
the agreement provided that the sale should be completed
by August 30, 1967 and time was deemed to be of the
essence. At the request of the plaintiffs, time for completion
was extended for one month to September 30, 1967. One of
the issues dealt with by the court was whether time for
completion had been waived by the grant of the one
months extension, such that time was no longer of the
essence.

The High Court held that the mere extension of time


stipulated in the agreement would not amount to a
waiver in every case. The decision in Wong Kup Sing was
distinguished as there were six extensions with continued
negotiations after the extended dates and an increased
forfeitable deposit in that case, while in the instant case
there was only one extension of time for completion granted
by the defendants.