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CHAPTER 19Rescission1 19.1 INTRODUCTIONRemedies provides the practical solutions to disputes in contractual relations. There are 4 main remedies: rescission, damages, specific performance and injunctions. The governing laws are provided in the Contracts Act and the Specific Relief Act, the application of the principles and the case law. Rescission (Rescind) means terminating a contract. There are 2 types of rescission: 1.rescission ab initio - applies to contracts which are not freely entered into due to vitiating factors such as coercion, undue influence, fraud or misrepresentation ( such contracts are voidable under ss 19 and 20 of the Contracts Act giving the innocent party the option whether to rescind or affirm the contract. 2."rescission for breach" applies when an innocent party is given the right to rescind when the defaulting party has refused or disabled himself from performing under s 40 of the Contracts Act.

2The courts have in such cases applied the common law concepts of repudiation and fundamental breach.The right to rescind is also provided in s 56(1) of the Contracts Act where there is failure to perform at the fixed time where time is of the essence of the contract. Rescission may be exercised by the giving of notice governed under the Contracts Act or by way of an application to the court under the Specific Relief Act.This chapter will examine: (i) when the option to rescind arises; (ii) the 2 meanings of rescission;(iii) exercise of the option to rescind;(iv) the effects of rescission provided in ss 65, 66 and 76 of the Contracts Act; and (v) rescission under the Specific Relief Act.

319.2 WHEN OPTION TO RESCIND ARISESUnder the Contracts Act, rescission is applicable in 2 main situations. First, when a contract is voidable under ss 19 or 20 of the Contracts Act. Section 19(1) provides that 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 20 provides that the contract is voidable where consent to an agreement was caused by undue influence.Definition of voidable contract : Section 2(i) provides that "an agreement which is enforceable by law at the option of one or more of the parties thereto, but not at the option of the other or others, is a voidable contract.Another situation in which an option to rescind arises is in cases of breach of contract.Under the common law, upon a repudiation or fundamental breach, the innocent party has a right of election whether to rescind/terminate the contract and treat himself as discharged from the said contract or to affirm the contract and treat the contract as still continuing.4This principle has been applied in Malaysia through s40 of the Contracts Act which provides that:"when a party to a contract has refused to perform, or disabled himself from performing, his promise in its entirety, the promisee may put an end to the contract, unless he has signified, by words or conduct, his acquiescence in its continuance". s 40 does not use the term "voidable" or "rescind. But the Privy Council decision of Muralidhar Chatterjee v International Film Co Ltd AIR 1943 PC 34, PC (Appeal from India) has held that a contract which may be put to an end under s 39 of the Indian Contract Act (in pari materia with s 40 of the Contracts Act) is a voidable contract and rescission under s 64 of the Indian Contract Act (in pari materia with s 65 of the Contract Act) applies. Section 65 of the Contracts Act provides 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".5In relation to a specific breach, that is, failure to perform at a fixed time where time is of the essence of the contract: s 56(1) of the Contracts Act provides that " ... the contract, or so much of it as has not been performed, becomes voidable at the option of the promisee ...".The House of Lords case of White and Carter (Councils) Ltd v McGregor [1962] AC 413, HL. is the authority for the right of election upon a repudiation. In this case, the appellants, advertising contractors, agreed with the representative of the respondent, a garage proprietor, to display advertisements for his garage for three years. On the same day, the respondent wrote to the appellants requesting them to cancel the contract on the ground that his representative was mistaken as to his wishes. In this case, when the respondent repudiated the contract, the appellants had an option; the appellant may either elect to rescind or to affirm the contract. 6Lord Reid stated:If one party to a contract repudiates it in the sense of making it clear to the other party that he refuses or will refuse to carry out his part of the contract, the other party, the innocent party, has an option. He may accept that repudiation and sue for damages for breach of contract, whether or not the time for performance has come; or he may if he chooses disregard or refuse to accept it and then the contract remains in full effect.In this case, the appellants elected to affirm it. The appellants refused to cancel the contract as requested by the respondents but went ahead with the advertisement and sued for the agreed price.The House of Lords by a 3 to 2 majority held that the appellants were entitled to choose to continue with the performance of the contract.In this case, the appellants had honoured their obligations under the contract and could recover the contract price.The House of Lords, however, laid out two restrictions on the innocent party's right to affirm:(1) an innocent party cannot affirm the contract where the continuation of the contract requires the cooperation of both parties and that cooperation is not forthcoming. (2) an innocent party may be denied the right to affirm if it is established that the party has no legitimate interest, financial or otherwise, in performing the contract rather than claiming damages. Ibid. at 428-431.(Do you agree with this restrictions?)The House of Lords decision is controversial and has raised much discussion.

The decision in White & Carter (Councils) Ltd [1962] AC 413, HL was applied in Malaysia in Teh Wan Sang & Sons Sdn Bhd v See Teow Chuan [1984] 1 MLJ 130. (See case: discussed in the context of mitigation of damages in Chapter 20.8 2 MEANINGS OF RESCISSION

1. "rescission ab initio" which arises in contracts entered into without free consent such as coercion, fraud, misrepresentation and undue influence (as provided in ss 19(1) and 20 of the Contracts Act).

2. "rescission for breach" where the option to rescind arises under s 40 when a serious breach occurs, or s 56(1) of the Contracts Act where time is of the essence of the contract.

It is necessary to distinguish between rescission ab initio and rescission for breach as the consequences that follow from each are different.9In rescission ab initio, when the innocent party takes the option to terminate a voidable contract because consent to the agreement was caused by coercion, fraud or misrepresentation or undue influence, the contract is treated as having been rescinded retrospectively from the time it was purportedly made, and the effect is as if the contract had never been entered into at all. The reason is that there is no consent which strikes at the very basis of a contract itself. In this situation, the relief is restitutionary in nature and there is no right to damages.Rescission for breach occurs when there is a repudiation or fundamental breach, and the innocent party elects to terminate the contract. In this situation, there is a perfectly valid contract but a serious breach by the defaulting has occurred which gives the innocent party a right to elect whether to rescind (terminate) or to affirm the contract. 10A rescission for breach sets aside the contract only prospectively - only future obligations of the parties are put to an end, but does not set aside the contract retrospectively.Rights and obligations which have accrued prior to the breach continue unaffected.

The two meanings of rescission have been recognised in the Privy Council decision of: Muralidhar Chatterjee v International Film Co Ltd 1616 AIR 1943 PC 34, PC (Appeal from India) when the Board considered whether s 64 of the Indian Contract Act (s 65 of the Contracts Act) applies to a contract which is put to an end under s 39 (s 40 of the Contracts Act) or is s 64 applicable only to rescission ab initio. On this issue, it was held that s 64 applies to both, thus, confirming the Board's acceptance of the two types of rescission.

Malaysian courts/ cases have preferred to use the term "termination" for cases of breach of contract, and "true rescission" (provided under Specific Relief Act) for cases of rescission ab initio. In Seremban Gold Resort Bhd v Amerfab Sdn Bhd [2006] 2 MLJ 571 where there was a breach of a sale and purchase agreement of land, the High Court stated that rescission of contract must be distinguished from its termination.In this case, it was held that the plaintiff's claim arose from its right as an innocent party "to put an end to its future obligations under the Specific Relief Act and so does not constitute a true rescission.13The Court preferred the word "termination" for cases of rescinding for breach of contract. The Court also quoted from the Court of Appeal's decision in Abdul Razak bin Datuk Abu Samah v Shah Alarn Properties Sdn Bhd [1999] 2 MLJ 500, CA and another appeal. In Abdul Razaks case, Gopal Sri Ram JCA stated as follows:The right of an innocent party to put an end to future obligations under a contract is sometimes referred to as 'the right to rescind' and the act of termination as 'rescission' is erroneous and misleading. True rescission is specific relief. It was invented by the Court of Chancery and Chapter IV of our Specific Relief Act 1950.(see Car & Universal Finance Co Ltd v Caldwell [1961] 1 QB 525) 1419.4 EXERCISE OF OPTION TO RESCINDThe principles governing the exercise of the option to rescind are as follows: (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; and (e) the right to rescind the contract may be waived.

When a contract gives an option to the innocent party whether to rescind or to affirm, the right must be exercised. The contract does not terminate automatically.

15The choice has to be communicated to the defaulting party, particularly if the innocent party elects to end the contract.While the innocent party is not required to elect immediately, he runs the risk while the contract remains in being.This has been explained by Rix LJ in Stocznia Gdanska SA v Latvian Shipping Co. Latreefer Inc & Ors [2002] 2 Lloyds Rep 436, CA as follows:If he does nothing for too long, there may come a time when the law will treat him as having affirmed ... can be overtaken by another event which prejudices the innocent party's rights under the contract - such as frustration or even his own breach. He also runs the risk ... that the party in repudiation will resume performance of the contract and thus end any continuing right in the innocent party to elect to accept the former repudiation as terminating the contract. Ibid, at 452. (Emphasis added)16Thus, a claimant's right to terminate may be lost: 1. by his own conduct either by affirming the contract or2. by his own subsequent breach;3. by the other party's conduct in resuming performance; and 4. by operation of law such as a supervening event as in frustration.

In P Palakrisnan a/l Perianan lwn Krishnamoorthy a/l Sinniah dan satu lagi [2001] 5 MLJ 389, the High Court held that there is no concept of an automatic termination and a party who intends to terminate a contract on the basis of the other party's breach must state his intention to do so in writing. It appears that even if an agreement provides for termination without having to give notice, a notification to this effect is still necessary. An innocent party who has the option whether to rescind or to affirm a contract must exercise his option and communicate his decision within a reasonable time to the other party.

In Chin Kim & Anor v Loh Boon Siew [1970] 1 MLJ 197, FC. 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 paid $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. The purchaser took no further steps until the writ in the action was issued on August 29, 1966 in which he claimed specific performance of the contract. The Federal Court held that on the repudiation of the contract by the vendors, the purchaser should have made a clear stand as to whether or not he accepted the repudiation or refused it.The Federal Court further held that it is not reasonable for a purchaser to take four years to decide his action after the breach of the sale and purchase agreement by the vendors. In view of the delay of the purchaser, the proper inference was that he had accepted the repudiation

19The Federal Court's view was affirmed by the Privy Council on appeal. (See Loh Boon Slew v Chin Kim & Anor [1972] 1 MLJ 139.)The innocent party's decision to rescind must be communicated to the other party. Section 67 of the Contracts Act provides that the rescission of a voidable contract may be communicated or revoked in the same manner, and subject to the same rules, as apply to the communication or revocation of a proposal. Sections 3,4,5 and 6 of the Contracts Act provide for the rules on the communication and revocation of a proposal.20In Perkayuan OKS No 2 Sdn Bhd v Kelantan State Economic Development Corp [1995] 1 AMR 944; [1995] 1 MLJ 401, FC, the Federal Court held that the notice of termination must contain clear details for the termination to be effective. In this case, the appellants had entered into an agreement with the respondents wherein the appellants were allowed to carry out logging in a timber concession. Subsequently, the respondents served a notice on the appellants to terminate the agreement alleging that the appellants had breached the agreement by infringing clause 18, inter alia, by assigning the main agreement to a third party without the respondents' written consent. The Federal Court held that the respondents' notice to the appellants to terminate the agreement was incomplete as the matters set out were ambiguous and vague.21The respondents' allegation that the appellants had assigned their rights under the main agreement to third parties lacked details on the identity of the third parties. The allegation must be sufficiently particularised to enable the appellants to admit or to deny. Such an ambiguous notice did not amount to a legal notice.However, the choice whether to rescind or to affirm, once made by the innocent party, is irrevocable; the decision is final and will be binding on him. This was explained by Edgar Joseph Jr J in Goh Hooi Yin v Lim Teong Ghee & Ors [1990] 3 MLJ 23.A person who has open to him two alternative 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 ( See Haynes v Hirst (1927) 27 SR (NSW).

According to the Court of Appeal in Lim Ah Moi v AMS Periasamy Suppiah Pillay [1997] 4 AMR 3830; [1997] 3 CU 629, CA, this rule is adopted in the interests of certainty and fairness so that the party affected knows where he stands.If an innocent party does not exercise his option to rescind, he may be said to have waived his right to rescind and will be deemed to have elected to treat the contract as subsisting. In Sim Chio Huat v Wong Ted Fui [1983] 1 MLJ 151, FC a housing developer had failed to deliver the houses within the stipulated time frame. As time was of the essence, when the breach occurred, the respondent had the option to either affirm the contract or rescind the same. However, instead of making any express intimation of either, the respondent allowed the delivery date to pass and further ordered extra works to be carried out. The Federal Court held that by his action, the respondent had waived the right to rescind and was, therefore, deemed to have elected to treat the contract as still subsisting.

2319.5 EFFECT OF RESCISSIONWhen a contract is rescinded, certain consequences follow. The effects of rescission are provided in ss 65, 66 and 76 of the Contracts Act which are reproduced in full below:S65 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.S66 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.S76 A person who rightly rescinds a contract is entitled to compensation for any damage which he has sustained through the non-fulfilment of the contract.Under s 65 of the Contracts Act, when the innocent party rescinds the contract, "the other party thereto need not perform any promise therein contained in which he is promisor". 24Applying the principle in Muralidhar Chalterjee, thus, a party who rescinds, or in the words of s 40 of the Contracts Act, puts an end to the contract, has an obligation under s 65 to restore any benefit that he has received from the other party. At the same time, he is also entitled to compensation under s 76 of the Contracts Act for the losses suffered through the non-fulfilment of the contract.Muralidhar Chatterjee's case was followed in Yong Mok Hin v United Malay States Sugar Industries Ltd [1967] 2 MLJ 9, FC. This case is significant as the Federal Court held that when a contract is rescinded, besides s 65, s 66 of the Contracts Act applies as well. Having referred to the Privy Council's decision on the application of s 65 of the Contracts Act to cases of rescission under s 40 (ss 64 and 39 of the Indian Contract Act, respectively), the Federal Court further considered the application of s 66. It must be noted that s 66 applies to an agreement "discovered to be void, or when a contract becomes void".

25In relation to the term "any person" in s 66 of the Contracts Act, in Badiaddin bin Mohd Mahidin & Anor v Arab Malaysian Finance Bhd [1998] 1 AMR 909; [19981] 1 MLJ 393 , the Federal Court held that any person who is bound to restore or to make compensation for any benefit received by him under s 66 must be interpreted as any person who is a party to the contract. 26According to the Court, if the term "any person" is extended to a person who is not a party to the contract, this will infringe the most basic principle in the law of contract, that is, the doctrine of privity of contract. In this case, Mohd Azmi FCJ stated:... Under that section [s 66], the party who is bound to restore any advantage received or to make compensation for such advantage should be construed as 'any person' who is a party to the agreement and has received any advantage pursuant to the terms or conditions of the invalid contract, and not otherwise. To extend the meaning of 'any person' in s 66 to strangers to the agreement would be in violation of the elementary principle of contract. Since the loan agreement was strictly between the respondent and Ismail, the court had no jurisdiction to order the appellants to pay under s 66 merely because he had received a fraction of the loan money from Ismail. The appellants were not a party to the loan agreement and as such there was no question of repayment by them either by way of restitution of benefit or compensation. [1998] 1 MU 393 at 411

27It has been submitted that the Federal Court has given a narrow interpretation to s 66 of the Contracts Act and that the doctrine of privity is not relevant to the interpretation of "any person" in s 66. Another point to note from Yong Mok Hin is the Federal Court's decision that an innocent party who rescinds a contract under s40 of the Contracts Act is entitled to claim damages under s 75 of the Contracts Act. The decision in Yong Mok Hin 's case that ss 66 and 75 of the Contracts Act are applicable to rescission.In relation, to rescission ab initio, the High Court of Nagpur in Haji Ahrnad Yarkhan v Abdul Ghani & Anor AIR 1937 Nag 270 decided that s 75 of the Indian Contract Act (s 76 of the Contracts Act) will not apply to grant damages for rescission of a voidable contract based on fraud, since it is not a case of non-fulfilment of a contract.When a contract is rescinded for fraud, it is rescinded ab initio as if it had never been in force, and consequently, restitution (not compensation) is all that can be claimed.

2819.6 RESCISSION UNDER THE SPECIFIC RELIEF ACTBesides the Contracts Act, provisions on rescission are also found in the Specific Relief Act in ss 34-37 in Chapter IV. Section 34(1) of the Specific Relief Act provides as follows:Any person interested in a contract in writing 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; and(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.According to the Court of Appeal in Abdul Razak bin Datuk Abu Samah v Shah Alam Properties Sdn Bhd and another appeal quoted earlier, these areprovisions on "true rescission" (as contrasted with termination cases) which originated from the Court of Chancery. However, there are also cases on breach of contract which have applied s 34 of the Specific Relief Act.55

29The phrase "any person interested in a contract in writing" has been given a broad interpretation and includes persons who although not named as a party to a contract, have an interest in it. Sinnadurai has suggested that rescission under the Specific Relief Act may be preferred in instances where the party wishing to rescind may not be absolutely certain of his right to do so and thus, may rather seek an order from the court to rescind the contract. Section 35 of the Specific Relief Act allows rescission for mere mistake and as was observed in the earlier discussion on mistake, although it is very wide in not requiring the mistake to be a mutual or common mistake, it is only granted if the party against whom it is adjudged can be restored to substantially the same position as if the contract had not been made.Section 36 provides that a plaintiff who has commenced an action for specific performance, can as an alternative, claim that the contract be rescinded if the contract cannot be enforced specifically.Section 37 provides that "on adjudicating the rescission of a contract, the court may require the party to whom the relief is granted to make any compensation to the other which justice may require". 30The scope of s 37 was explained by the Federal Court in Ganam dlo Rajamany v Somoo s/o Sinniah [1984] 2 MLJ 290, FC. In this case, Seah FCJ quoted the case of Erlanger v New Sombrero Phosphate Co [1877-78] 3 App Cas 1218 at 1278 as follows:It is, I think, clear on principles of general justice, that as a condition to a rescission there must be restitutio in integrum. The parties must be put in status quo. See per Lord Cranworth in Addle v The Western Bank LR 1 HL 165. It is a doctrine which has often been acted upon both at law and in equity ..

The Court quoted s 37 of the Specific Relief Act and continued:

The principle underlying this section [s 371 is whether compensation should be awarded at all or what should be the measure of compensation must depend on the special circumstances of each case. The aim shall be to restore the contracting parties as much as possible to the same position which existed before the contract. In other words, there should be a restitution of the benefits received.In short, he who seeks equity must do equity. Ibid, at 299.

The provision in s 37 requiring a party rescinding a contract to compensate the other party as justice may require is an application of the principles of equitable relief applicable to rescission under the Specific Relief Act.

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