Contracts form the backbone of numerous business and personal agreements. When one party fails to fulfil their obligations under a contract, it is considered a breach. Understanding what constitutes a breach, the different types of breaches, and the remedies available under Malaysian law is crucial for safeguarding your rights and interests.
What Constitutes a Breach of Contract?
A breach of contract occurs when one party fails to perform their contractual duties without a lawful excuse. This failure can manifest in various forms, such as non-performance, partial performance, or defective performance of the contractual obligations. Under Contracts Act 1950, several sections address the consequences and remedies for breach of contract.
Types of Breaches
A. Minor Breach (Partial Breach):
A minor breach occurs when the breaching party fails to perform a small part of their obligations under the contract. The non-breaching party can sue for actual damages but must still fulfill their part of the contract. For example, in Yew Kim Tan @Yew Kim Lan v Mallika i/k S Subramaniam [2011] 5 MLJ 589, the Court of Appeal held that a delay in submission did not affect the completion date and thus was considered a minor breach
B. Material Breach:
A material breach is a substantial failure to perform under the contract, allowing the non-breaching party to terminate the contract and seek damages. This type of breach affects the core of the contract. The Federal Court case Ban Hong Joo Mines Ltd v Chen & Yap Ltd [1969] 2 MLJ 83 exemplifies a material breach where a failure to pay fortnightly payments was deemed substantial enough to allow for contract termination.
C. Anticipatory Breach:
An anticipatory breach happens when one party indicates, through words or actions, that they will not perform their contractual obligations when due. The innocent party can treat the contract as breached and seek remedies immediately. In Frost v Knight [1872], it was established that anticipatory repudiation allows the non-breaching party to sue for breach before the performance is due.
D. Fundamental Breach:
A fundamental breach is a severe breach that permits the innocent party to terminate the contract and sue for damages. It is similar to a material breach but is considered more severe in its impact on the contract. The case Hong Kong Fir Shipping Co Ltd v Kawasaki Kisen Kaisha Ltd [1962] 2 QB 26 illustrates the principle that a breach of an essential term allows the non-breaching party to treat the contract as terminated.
Legal Provisions
Under the Malaysian Contracts Act 1950, several sections specifically address the consequences and remedies for breach of contract:
Section 40: This section provides that when a party to a contract refuses to perform or disables themselves from performing their promise in its entirety, the promisee may put an end to the contract unless they have signified, by words or conduct, their acquiescence in its continuance.
Section 65: This section deals with the consequences of rescission of a voidable contract, stating that any person who has received any advantage under such a contract is bound to restore it or to make compensation for it to the person from whom he received it.
Section 74: This section provides that when a contract has been broken, the party who suffers by such breach is entitled to receive compensation from the party who has broken the contract for any loss or damage caused to him thereby, which naturally arose in the usual course of things from such breach, or which the parties knew, when they made the contract, to be likely to result from the breach of it.
Remedies Available Under Malaysian Law
When a breach of contract occurs, the innocent party is entitled to various remedies under Malaysian law. These remedies aim to restore the injured party to the position they would have been in had the breach not occurred.
1. Damages:
Compensatory Damages: The most common remedy, compensatory damages aim to cover the direct losses and costs incurred due to the breach. In Johnson v Agnew [1980] AC 367, the UK House of Lords confirmed that compensatory damages are meant to place the innocent party in the position they would have been in if the contract had been performed.
Liquidated Damages: These are pre-determined damages specified in the contract itself, enforceable provided they are a genuine pre-estimate of loss. In Cubic Electronics Sdn Bhd (in liquidation) v Mars Telecommunications Sdn Bhd [2019] 6 MLJ 15, the Federal Court clarified that under Section 75 of the Contracts Act 1950, reasonable compensation can be awarded irrespective of whether actual loss or damage is proven. This case emphasised that the concepts of 'legitimate interest' and 'proportionality' should be considered in determining reasonable compensation.
Nominal Damages: Awarded when a breach occurs but the non-breaching party has not suffered any actual loss. In Pancaran Prima Sdn Bhd v Iswarabena Sdn Bhd [2021] 1 MLJ 1, the Federal Court held that nominal damages ranges from RM10 to RM2,000 based on previous court judgements.
2. Specific Performance:
A court order requiring the breaching party to perform their contractual obligations. This remedy is typically used when damages are inadequate to compensate the non-breaching party, such as in contracts involving unique goods or properties.
3. Injunctions:
An injunction is a court order that either restrains a party from doing something (prohibitory injunction) or compels them to do something (mandatory injunction). This remedy is used to prevent further breaches or to compel specific actions.
4. Rescission:
Rescission allows the non-breaching party to cancel the contract and be restored to their original position before the contract was formed. This remedy is typically available when a breach is so serious that it undermines the very basis of the contract.
5. Restitution:
Restitution aims to prevent the breaching party from being unjustly enriched at the expense of the non-breaching party. It involves returning any benefit conferred to the breaching party.
Conclusion
Understanding the nuances of breach of contract and the remedies available under Malaysian law is essential for protecting your legal rights. If you find yourself dealing with a potential breach of contract, it is advisable to seek professional legal advice to navigate the complexities and ensure you receive the appropriate remedy.
If you have any questions regarding the article, please feel free to contact our managing partner, Eugene Yeong.
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