Niceties In The Face Of An Outright Refusal To Perform A Contract
Recently the Federal Court in Catajaya Sdn Bhd v Shoppoint Sdn Bhd & Ors  2 MLJ 374 held that termination clauses in contracts must be strictly followed.
“Reading the terms of the SSA in its entirety, we find that there is no latent ambiguity; the obligations of the parties are specifically defined. Termination is not permitted unless as expressly stipulated under SSA. Notice must be given to the appellant to rectify the identified breach and take steps to rectify that breach within the prescribed time as agreed. There must be strict adherence to the clauses in an agreement which relates to termination.”
The decision raises the question whether in the face of an outright refusal to perform a contract (which was not the case in Catajaya), the standard “notice to remedy” requirement relating directly to termination clauses still require strict compliance. The High Court in Live Scape Sdn Bhd v World Wonder Fest Sdn Bhd  MLJU 96 briefly dealt with this question, which is discussed in this alert.
The Catajaya Case
The respondents entered into a Share Sale Agreement (SSA) to sell their entire issued and paid-up shares in Shoppoint to Catajaya for RM17,063,660. This sum was payable by 31.12.2008. Catajaya paid RM1,706,366.00 as a deposit. Close to the completion date via letter dated 24.12.2008, Catajaya asked the respondents for an extension of time to pay the balance purchase price, but this was rejected. Approximately two weeks, by letter dated 12.01.2009, the second and third respondents notified the appellant of their intention to terminate.
Despite the issuance of the letter of termination, the respondents indicated that they were still prepared to allow Catajaya time to complete the SSA if a certain portion of the balance purchase price together with late interest was paid. By a letter dated 19.01.2009, the second and third respondents had requested for payment of 20% of the total purchase price as well as late interest as consideration for any extension of time.
There was a subsequent letter of termination dated 16.02.2009 after which on 12.3.2009 again through letter, the second and third respondents indicated that they were still open to consider any proposal for extension of time and late interest payment. These facts suggest that the Catajaya case was a situation where there was no finding of outright refusal to perform the contract by either party. Negotiations were still ongoing in Catajaya despite the issuance of notices to terminate.
Is There A Need For Strict Compliance?
Outright refusal to perform a contract amounts to repudiation of a contract which has its roots in common law. In BskyBv Hp Enterprise Services UK Ltd  BLR 267, the court found:
“Take, for instance, a case where a party says that it will no longer perform the contract or acts in such a way. I do not consider that in such a case the innocent party must give notice and wait 30 days before it can terminate the contract at common law based on a repudiatory breach.”
In Live Scape case, the High Court held that:
“However, this is not set in stone. As with all general rules, there are always exceptions. This would depend on the facts of each case. This could be seen in the decision of the Court of Appeal in Lay Hong Food Corporation Sdn Bhd v Tiong Nam Logistics Solutions Sdn Bhd  10 CLJ 680. In that case, the Court of Appeal agreed that the notice of termination was effective despite not complying with the six months’ time frame provided under the terms of the agreement, as it would have been impossible to do so as the agreement would have expired a month after the notice was issued by the innocent party…
At the very least, the Plaintiff is entitled to terminate the Agreement according to common law principles based on the Defendant’s decision not to pay the sums due as indicated in its solicitor’s letter dated 13-8-2019.”
Hence, where there is an outright refusal to perform the contract, the common law right to terminate is available to the innocent party and it does not have to strictly comply with termination clauses. The question is whether the common law right and contractual right can co-exist following the Catajaya case.
In Wickman Machine Tool Sales Ltd V Schuler AG  1 WLR 840, the United Kingdom Court of Appeal held:
“…In short, if one party or the other was guilty of a breach which went to the root of the contract and was not capable of remedy, then the injured party could treat himself as discharged from further performance. But, if it is a breach which does not go to the root of the contract - and it is only a material breach which is capable of remedy - then clause 11(1)(a) does apply.”
The case of SPM Membrane Switch Sdn Bhd v Kerajaan Negeri Selangor  1 MLJ 464 provides that the rights of termination under common law and the contract may not co-exist unless the contract provides that they may do so and in the absence of such a clause such as in Stocznia Gydnia SA v Gearbulk Holdings Ltd  EWCA Civ 75,although fact-specific, a party may, prima facie, rely on both contractual and common law rights without thereby affirming the contract.
The Catajaya case did not provide for a situation where there is an outright refusal to perform as opposed to the factual matrix of the Live Scape case where the defendant expressly refused to make payment which hampered the plaintiff from fully performing its contractual obligations resulting in the plaintiff terminating the contract.
It follows from the foregoing that parties to a contract may still be able to argue that where there is an outright refusal to perform, the common law right of termination will be available and strict compliance with termination clauses need not be necessary. In this regard, it is beneficial to examine the Federal Court’s findings in the Catajaya case where it made commercial sense for a notice to remedy to be given as the parties were still negotiating despite the issuance of the notice of termination.
“…The appellant have paid a substantial sum as deposit for the purchase the shares and the land therefore, it makes commercial sense that the appellant be given the opportunity to rectify the purported breach as envisaged under section 12 of the SSA. The parties were still negotiating despite the issuance of the notice of termination.”
One could argue that the reverse is also true, i.e. that it will run counter to commercial sense to give a notice to remedy to a party that has clearly expressed its refusal to perform the contract.
Hence, the Catajaya case may not have shut the door completely on non-compliance with termination clauses where there is outright refusal. Requiring a party to strictly comply with termination clauses in the face of outright refusals to perform are mere niceties which do not give effect to commercial sense.
Authored by Zoya Malik, a pupil with the firm’s dispute resolution practice.
20 March 2023