LXEB 1122 ASSIGNMENT

Semester II
2015/2016

POO HAO YI

LEB 150111

1
Introduction

S 2(i) Contracts Act 1950 provides that a contract is voidable when it is

only enforceable at the option of one party but not at the option of the another

party. Therefore, the party who holds the option can choose to affirm the

contract or rescind it within a reasonable time. According to Contract Law in

Malaysia,1 there are two types of rescission. Rescission ab initio (under s 19

and s 202 Contracts Act 1950) happens to voidable contract rescinded ab initio,

usually due to the lack of free consent. It makes the contract to be never exist

before. On the other side, rescission by breach (under s 403 Contracts Act 1950)

occurs to contract rescinded because of fundamental breach. It terminates the

contract prospectively, preserving the parties’ previous rights and excluding

future obligations.

When rescission is chosen, there are three sections in the Contracts Act

1950 that may be applied to grant reliefs and remedies to the parties. They are

s 65, s 66 and s 76. However, the use of those sections in a rescission will be

determined by the type of rescission.

In Yong Mok Hin v United Malay States Sugar Industries Ltd (“Yong Mok

Hin”), 4 MacIntyre J had ruled that in a situation whereby a contract was

rescinded under s 40, s 65 applies obligation of restoration to the innocent party

and that obligation is extended to the default party in s 66. His lordship also

1
See Cheong, M. (2010). Contract law in Malaysia (1st ed.). Petaling Jaya, Selangor, Malaysia: Sweet
& Maxwell Asia, at p 454.
2
S 19 and s 20: Agreement entered with coercion, fraud, misrepresentation and undue influence is
voidable at the option of the innocent party (party whose consent was so caused).
3
S 40: When a party refuses to perform, or disabled himself from performing, his promise entirely,
the innocent party (promisee) can choose to put an end to the contract or to continue with it.
4
[1967] 2 MLJ 9.

2
held that s 75 could be applied by the innocent party for compensation. To say

briefly about his judgement, the innocent party who rescinds a contract will be

able to claim for damages not only under s 76, but also to get restoration of

benefits under s 66 whilst the default party can be restored advantages given

to the innocent party under s 65 or s 66.

His judgement has been opposed by Dato’ Seri Dr. Visu Sinnadurai

(“Sinnadurai”) in his Law of Contract. 5 The learned author submits that the

application of s 66 and s 75 by an innocent party in a rescission by breach is

incorrect and suggests that s 76 to be the most appropriate section for the

innocent party to claim damages. Party in default shall apply s 65 to claim for

restoration of benefits. So, concluding his submission, s 76 only shall be used

on the innocent party to claim damages, and at the same time, he shall be liable

to restore benefits to the default party under s 65.

Discussion

Before picking a stand between two arguments above, there are several

questions to be asked:

i. What are the natures and applications of s 65 and s 66?

ii. What is the nature and application of s 76?

iii. Can s 65/ s 66 and s 76 be used conjunctively?

5
See Sinnadurai, V. (2003). Law of contract (3rd ed.). Kelana Jaya: LexisNexis Butterworths at p 686.

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Question i : What are the natures and applications of s 65 and s 66?

Restitution or restoration arises from a failure contract but not from

contractual obligation.6 It is to put back the parties in a position as if the contract

has never happened. It is restitutionary in nature and is often applied onto

contract void ab initio/void agreement or rescinded ab initio.7 The parties are to

restore benefits gained from each other.

S 65 deals with the consequences that may arise after a rescission is

made onto a voidable contract. It provides that the innocent party who rescinds

the contract shall restore any benefit he received from the another party.

Looking from the words itself, it is of restitutionary nature and the obligation to

make restoration has been restricted to the innocent party alone. It has been

applied only into cases rescinded ab initio before Privy Council in Muralidhar

Charterjee v International Film Company Ltd (“Muralidhar”)8 has ruled the other

way round, meaning that s 65 is also applicable in rescission by breach, under

s 40. The court had referred to illustrations in s 40 and s 66, whereby it found

that illustration s 40 had the same situation with illustration (c) of s 66.

Furthermore, after analysed illustration (c) s 66, the court found that it actually

brought the meaning of s 65. Besides, the court also referred to Pollock & Mulla9

which says that whenever one party has an option to annul a contract, the

contract is said to be voidable. 10 Therefore, the court came out with the

conclusion that a contract which had been repudiated and the innocent party

6
Tan Chee Hoe & Sdn Bhd v Code Focus Sdn Bhd [2014] 3 MLJ 301.
7
An example applying s 65 to rescission ab initio is Bovis (Malaysia) Sdn Bhd v Samaworld (Malaysia)
Sdn Bhd & Anor [1997] MLJU 205.
8
AIR 1943 PC 34.
9
Abichandani, R., Pollock, F., Mulla, D., & Kapur, J. (1994). Pollock & Mulla on Indian Contract and
Specific Relief Acts (11th ed.). Bombay: N.M. Tripathi.
10
Ibid at p 365.

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has the option to rescind it, is a voidable one that falls into ambit of s 65.

Therefore, applying principle in s 65 to rescission by breach under s 40, the

party in default is entitled to claim damages in the form of restoration of benefits

from the innocent party.

In short, s 65 applies to both types of rescission, although bringing the

effect to be restitutionary.

Moving into s 66. S 66 provides that any person who has received

advantages from a contract which is discovered to be void or becomes void, is

bound to restore the benefits to or compensate the person giving the benefits.

The ‘any person’ has been held to be referring to the parties of the contract only,

not including a third party who has received advantages from the alleged

contract.11 Since that this section binds on both parties to make restoration, it

is also a restitutionary provision which is usually applied on voidable contract

rescinded ab initio and void agreement. It covers void agreement (discovered

to be void) and contract rescinded ab initio (becomes void).

A contract discovered to be void is usually void agreement as it

contravenes with few provisions in Contracts Act 1950.12 Since that the contract

is void ab initio, no relief can be based on contractual rights but relief is

obtainable in restitution.13 However, the party or parties to it must be ignorant

of the fact that the contract is forbidden when they are entering the contract.

11
Badiaddin bin Mohd Mahidin v Arab Malaysian Finance Bhd [1998] 1 MLJ 393, FC.
12
S 26: Agreement void without consideration.; S 10(1): Parties must be competent to contract.; S 24,
s 25, s 27, s 28 and s 29: Agreement void due to illegality.; S 30: Agreement void for uncertainty.
13
See Cheong, M. (2010). Contract law in Malaysia (1st ed.). Petaling Jaya, Selangor, Malaysia: Sweet
& Maxwell Asia and Lori Malaysia Bhd v Arab-Malaysian Finance Bhd [1999] 2 CLJ 997.

5
 One of the provisions rendering agreement void is s 10 Contracts Act

that requires both parties to be competent to contract, by attaining age of

majority (s 11). Whenever a minor enters into a contract, the contract is a void

agreement and unenforceable. 14 In Leha binte Jusoh v Awang Johari bin

Hashim,15 the court had applied s 66 to the void agreement entered by minor

and required deposit to be refunded to the minor while the minor shall vacate

the land. Benefits accepted by each other were restored. Another example is a

contract tainted with illegality. The contract is void and unable to be enforced

under s 24 and s 25. In Ng Siew San v Menaka,16 the court found that, since

the contract is forbidden by s 8(b) and (c) Moneylender Ordinance 1951, it is a

void agreement and s 66 was applied to order the appellant to return RM19,400

to the respondent, after setting-off the benefits had been conferred to each

other.

When a contract may be rescinded ab initio, the contract must not have

been freely consented by either party or both parties. Their consents are usually

vitiated by factors in s 14 Contracts Act.17 So, when the innocent party has

realised that he has been induced by either factor into the contract, he has the

right to rescind the contract in a reasonable time, rendering the contract

‘becomes void’ as if it has never been entered into. The contract ceases to be

enforceable and becomes void eventually.18 Hence, obligation for restoration

emerges, requiring the innocent party only (s 65) or both parties (s 66) to do so.

14
See Mohori Bibee v Dharmodas Ghose [1903] 1 LR 30 Cal 539.
15
[1978] 1 MLJ 202.
16
[1973] 2 MLJ 154.
17
Those factors stated in s 14 are, coercion, undue influence, fraud, misrepresentation and mistake.
18
Section 2(j).

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In the case of Satgur Prasad v Har Narain Das,19 a case where undue influence

and fraud were alleged and the respondent rescinded the contract, the court

held that the wordings of s 65 Indian Contract Act (in pari materia with s 66

Contracts Act 1950) was sufficient to cover the present case. The court had

also agreed with Reg v Saddlers’ Co, 20 which said that the rights and the

remedies of the party were the same as if the contract had been void from the

beginning.

In another word, s 66 applies to void agreement or contract rescinded

ab initio to give restoration of benefits to parties of it as if the contract has never

existed before. It is restitutionary in nature and is unable to be applied like s 65

into contracts rescinded by breach.

However, its linkage and relationship contract rescinded by breach s 40

have always been considering but yet confusing. As said above, the illustration

under s 40 has the similar circumstances and plot with the illustration (c) stated

under s 66. A, a singer has contracted with B, a manager of a theatre to sing in

his theatre every two nights a week and B promises to pay her RM100 each

night. When A wilfully did not attend the sixth night, B has the option to put an

end to the contract (illustration s 40) but will have to pay A for the first five nights

she has sung if A chooses to rescind the contract (illustration (c) s 66). It seems

that the Act itself is suggesting that when a contract is rescinded under s 40, s

66 will provide the effects and reliefs. But, the illustration is deemed to be

bringing the effect of s 65 but not s 66 as it states only the party rescinding the

contract (B) must restore benefits (wages for the first five nights) to the party in

19
(1932) 59 IA 147.
20
(1863) 10 HLC 303.

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default (A). Therefore, Privy Council in Muralidhar’s case had held that s 65

applies instead of s 66. It was only until the ruling in Yong Mok Hin’s case, s 66

was held to be applicable onto contract rescinded by s 40. Again, the judge had

referred to Muralidhar’s case and relied on views from Pollock & Mulla.21 This

would extend the liability to make restoration of benefits to the defaulting party,

making the innocent to specially claim restoration under s 66 which may have

been covered in the compensation in s 76, that will be discussed below. It must

be noted that, although the judge has taken views from Muralidhar’s case, the

court in Muralidhar has said quite the contrary, by saying that ‘… a liability to

make restitution attaches to the party putting an end to the contract’.22

In conclusion, s 65 and s 66 are restitutionary in nature. Their application

to rescission by breach under s 40 is still restricted to s 65 only as s 66 is less

recognized to be applicable to s 40.

Question ii : What is the nature and application of s 76?

A compensation is made to compensate an injured party (innocent party)

for the losses he has suffered as a consequence of breach. This principle works

on the basis that to place the him as so far as possible in the same position as

if the contract has been performed.23 According to Milicent Rosalind Danker &

Percetion Management International Limited v Malaysia- Europe Forum Berhad,

21
‘Whenever one party…has the option of annulling it, the contract is voidable. And when he makes
use of that option the agreement becomes void.’ Pollock & Mulla, Indian Contract Act, 6th edition, at p
365.
22
AIR 1943 PC 34, at p 46.
23
Abichandani, R., Pollock, F., Mulla, D., & Kapur, J. (1994). Pollock & Mulla on Indian Contract and
Specific Relief Acts (11th ed.). Bombay: N.M. Tripathi at p 801.

8
Natasha Zulkifli & Anor (“Milicent”), 24 the compensation of contract law will

include defeat of an expected gain, expenditure incurred in reliance on the

promised performance, restitution of benefits (given to the defaulting party) and

actual harm inflicted due to the breach.

As pointed out in Yong Mok Hin’s case, s 75 was said to be applicable

when a case was rescinded by breach. Their Lordships’ decision has been

thrown a lot of critics. Some scholars opine that their Lordships have overseen

the section and are supposedly referring to s 76.25 This inference is reasonable

and logical as s 75 governs the compensation for breach of contract where

there is a liquidated damages or penalties clauses stated in the contract itself.

It deals not much with reliefs of rescission. Moreover, since that their Lordships

have actually referred to Muralidhar’s case, which that court had never

mentioned about s 75 at all, how could their lordships come out with such a

decision? It is crystal clear that court in Muralidhar has discussed about s 75

Indian Contract Act (in pari materia with s 76 of our Contracts Act 1950). Hence,

it appears that when their Lordships suggested about s 75, they would have

directed their mind to s 75 Indian Contract Act, which is s 76 of our Contracts

Act.

If their Lordships have really ruled according to the inference above, then

their ruling will be consistent and parallel to the commentary stated by

Sinnadurai. S 76 says that, when a contract is rightly rescinded by a party, the

person is entitled to compensation for any damage which he has sustained

24
[2011] MLJU 452.
25
See Cheong, M. (2010). Contract law in Malaysia (1st ed.). Petaling Jaya, Selangor, Malaysia: Sweet
& Maxwell Asia at p 462.

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through the non-fulfilment of the contract. This is at least certain that, the law

gives rights to innocent party, who has chosen to terminate the voidable

contract26 to claim back his losses and be compensated for what he should get

if the contract is executed well and smoothly.

Although its application is on voidable contract which is rescinded by

innocent party, does it apply to voidable contract due to lack of free consent

(rescission ab initio) or voidable contract by breach (rescission by breach) or

both?

In Haji Ahmad Yarkhan v Abdul Gani Khan,27 the court had held that s

76 which applied on ‘non-fulfilment of contract’ shall not be applicable on

contract which became voidable with the presence of fraud and

misrepresentation. This is because in such case, the rescission has

retrospective effect and the contract would be rescinded ab initio as if it had

never been in force. Restitution was all could be claimed. To summarize what

the court has impliedly said, s 76 is not restitutionary in nature, but a

compensatory one. It could only be used in cases which rescinded by breach,

which the other party has repudiated the conditions of contract. So, its

compensatory application to rescission under s 40 is undoubted. This result is

supported by common law too. Court in Johnson & Agnew, 28 has clearly

recognized the rights to compensation should be conferred to the innocent party

since he has suffered the repudiation of contract by another party.

26
‘…has rightly rescinded…’ shows that the person must has the option to rescind it, and then he
makes use of it. So, the contract is voidable in accordance with s 2(i).
27
AIR 1937 Nagpur 270.
28
[1980] AC 367.

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 Nevertheless, it has also been pointed out by Muralidhar’s29 case that s

76 shares the same illustration with s 40. The theatre’s manager, after having

his contracted singer wilfully absents herself can put an end to the contract (s

40) and if he does so, he could claim compensation from her for the non-

fulfilment of contract (s 76). The similarity between the illustrations of sections

makes them highly possible to be read together. Since the illustration of s 76

itself suggests about rescission by breach but not rescission ab initio, it is more

certain that s 76 will apply to s 40.

Incorporating materials regarding s 76 discussed above, it is not hard to

conclude that s 76 has a compensatory nature that makes it to be more suitable

to be applied in voidable contract rescinded by breach under s 40, as in that

situation, obligations under the contract remains operative until the date of

rescission, and the innocent party is entitled to damages as if the contract has

been carried out.

Question iii : Can s 65/ s 66 and s 76 be used conjunctively?

I think it is ideal to reiterate briefly the meaning of restitution and

compensation here. Restitution is to put the parties of a contract as if the

contract has never come into existence. Therefore, they are both liable to

restore and get back benefits conferred upon each other. Compensation on the

other side, happens in only situation to put the party as if the contract has been

performed. It entitles the innocent party only to get compensated for all losses

before and after the rescission. So, it seems that when a restitution is needed,

29
AIR 1943 PC 34, at p 44 and 45.

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compensation will no longer be applicable and thus, it is hardly possible for s

65 and s 66 to be used together with s 76.

Nevertheless, it should be noticed that, s 65, a restitutionary provision is

applicable to s 40, a case which rescission by breach occurs and compensation

under s 76 should emerge. Besides, illustrations s 40, s 66 (c) (directing to s

65) and s 76 seems to relate these three sections together. So, it can be

concluded that when a rescission falls under s 40, s 65 and s 76 would be

applicable to the situation, but to different party. The party repudiates the

contract will use s 65 to get restored of benefits given whilst the innocent party

uses s 76 to claim for compensation. This is supported by Sinnadurai’s view

and some cases.30

Discussion above has dealt with application of both restitution and

compensation to a situation, but can them be used under the same party?

Compensation can only be employed by the injured or innocent party who

chooses to accept the breach by the other party by rescinding the contract. So,

the question must be, can an innocent party claim restoration under s 66 and

compensation for damages under s 76 simultaneously in a rescission by breach?

Looking into the wordings of s 76, it can be found the compensation to

be granted under this particular section includes any damage which the

innocent party has sustained through the broken (non-fulfilled) contract. So, it

will count in all losses the party endures or benefit delivered to the party

repudiating the contract before the rescission as well as damage or injuries

expected to be sustained after the contract has been rescinded. This has been

30
Hims Enterprise (M) Sdn Bhd v Ishak bin Subari [1992] 1 CLJ 132 and Travelsight (M) Sdn Bhd v Atlas
Corporation Sdn Bhd [2003] 3 AMR 317.

12
clearly stated by Milicent’s case. It is also understood that s 66 if were to be

used, it will cover benefits passed to the another party before the rescission.

Thence, both sections overlap on the context of benefits conferred to party in

default before the rescission of contract. Allowing the application of both

sections together will bring no change compared to the use of s 76 alone. It

seems that if s 66 were to be used, it will be superfluous in nature. Therefore,

instead of submitting both sections, innocent party should be confined to using

s 76 alone as there is no need for him and he should not be allowed to do so.

Conclusion

The three questions set up have been answered. In the light of the

answers arrived at, I will not agree with MacIntyre J, but to approbate

Sinnadurai’s view. Situations encountered by MacIntyre J and commented by

Sinnadurai are both of rescission by breach, hence the reliefs should be

measured as if the breach of contract never occurs. The appropriate section

giving the innocent party who rescinds the contract rights to claim damages

supposed to be s 76. As mentioned earlier, s 66 is not suitable to be applied

onto cases rescinded by breach due to its restitutionary background. Unlike s

65, it has insufficient link to s 40 as its illustration (c) seems to be an example

for s 65 more than itself. So, even that s 66 is to be applied, it can only be

restricted to the effect of s 65, whereby to give the party in default an alternative

claim for restoration of benefits, besides s 65.

If the scope of liability to make restoration s 66 is to be extended to the

party in default as well, like held by his Lordship in Yong Mok Hin’s case, I opine

13
that it is unnecessary and superfluous as its scope and effect have been

covered completely by s 76.

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Bibliography

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Selangor, Malaysia: Sweet & Maxwell Asia.

2. Cheong, M. (2010). Contract law in Malaysia (1st ed.). Petaling Jaya, Selangor,

Malaysia: Sweet & Maxwell Asia.

3. Cheong, M. (2007). Civil remedies in Malaysia (1st ed.). Petaling Jaya,

Selangor, Malaysia: Sweet & Maxwell Asia.

4. Abichandani, R., Pollock, F., Mulla, D., & Kapur, J. (1994). Pollock & Mulla

on Indian Contract and Specific Relief Acts (11th ed.). Bombay: N.M. Tripathi.

5. Sinnadurai, V. (2003). Law of contract (3rd ed.). Kelana Jaya: LexisNexis

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Ehsan, Malaysia: LexisNexis.

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and Commentary (2nd ed.). Singapore: Butterworths.

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