A commentary on the Berjaya Times Square v M-Concept Case by Aufa bt Radzi.
 
Introduction
 
In Berjaya Times Square Sdn Bhd v M-Concept Sdn Bhd [2010] 1 CLJ 269, the Federal Court had the occasion to consider the effect of Section 56(1) of the Contracts Act 1950 (“Act”) where a party to a contract which has a “time is of the essence” clause failed to fulfil its obligation within the time prescribed.
 
Section 56(1) entitles a non-defaulting party to rescind the contract and reads as follows:
 
“When a party to a contract promises to do a certain thing at or before a specified time ... and fails to do any such thing at or before the specified time, the contract, or so much of it as has not been performed, becomes voidable at the option of the promisee, if the intention of the parties was that time should be of the essence of the contract.”
 
Background
 
The appellant is the developer of a project now known as Berjaya Times Square. The respondent entered into a sale and purchase agreement with the appellant to purchase a commercial shop lot in the project.
 
The agreement required the appellant to deliver vacant possession of the shop lot to the respondent by a specified date, namely 23 November 1998, failing which the appellant would pay liquidated damages to the respondent for each day of the delay at the rate of 12% per annum of the purchase price. The agreement also stipulated time to be of the essence.
 
The appellant failed to deliver vacant possession within the stipulated time. After a series of negotiations, the parties agreed to extend the date for delivery of vacant possession on two occasions. During this time, the respondent continued to pay the progress payments of the purchase price. The appellant however still failed to meet each of two extended delivery dates.
 
After the expiration of the second extended deadline, the respondent commenced action against the appellant for various reliefs, including a declaration that the agreement has been rescinded and for an order that the appellant refund the purchase price.
 
High Court AND COURT OF APPEAL
 
The High Court found in favour of the respondent. The learned Judge, Hishamudin Yunus J, held that the appellant's failure to deliver vacant possession within the stipulated time constituted a fundamental breach of the contract which entitled the respondent to rescind the contract.
 
The High Court also held that time was of the essence of the contract and that the appellant's failure to deliver vacant possession within the stipulated time rendered the agreement voidable at the option of the respondent under Section 56(1) of the Act. The High Court also held that respondent's remedies were not therefore confined to a claim for liquidated damages under the agreement.
 
The decision of the High Court was upheld by the Court of Appeal.
 
FEDERAL COURT
 
In a total reversal of the decisions of the courts below, the Federal Court allowed the appellant’s appeal.
 
Gopal Sri Ram, FCJ, held that Section 56(1) of the Act should be read together with Section 40 of the Act which entitles a non-defaulting party to put an end to a contract where the other party refuses to perform his promise in its entirety, unless the non-defaulting party, by words or conduct, acquiesces in the continuance of the contract.
 
His Lordship opined that Section 40 of the Act is a restatement of the common law right of rescission which is exercisable only where there is a total failure of consideration. According to his Lordship, the phrase "his promise in its entirety" in that Section means that the right to repudiate a contract under Section 40 only accrues to the non-defaulting party when the defaulting party has refused or disabled himself from performing the whole of his promise. In other words, the innocent party may not put an end to the contract if there is part performance by the defaulting party.
 
The learned Federal Court Judge proceeded to interpret Section 56(1) in the light of Section 40. Firstly, his Lordship opined that the phrase "fails to do any such thing" in Section 56(1) of the Act must refer to the promise in its entirety. In other words, there must be a fundamental breach of the contract.
 
Secondly, Gopal Sri Ram, FCJ further opined that the phrase "becomes voidable at the option of the promisee" in Section 56(1) means that a non-defaulting party has a choice of putting an end to the contract or to acquiesce in its continuance when the defaulting party commits a fundamental breach of contract by not performing his entire promise, provided that time is of the essence of the contract.  
 
His Lordship then considered the effect of the time of essence clause in the agreement on the liquidated damages clause. According to his Lordship:
 
“... while individual contracts will fall to be interpreted in accordance with their own terms, it is a useful guide to construction that a stipulation as to time must be read along with other provisions of the contract to determine if time is truly of the essence of the contract. Further, a clause providing for the payment of a sum … as liquidated damages … in the absence of a contrary intention to be gathered from the contract, point to time not being of the essence.”
 
In his Lordship's judgment, time was not of the essence in this case as the promise to deliver within a stipulated time coupled with a promise to compensate for any delay in delivery is inconsistent with a right to terminate on the ground that time is of the essence. Instead, it pointed to an intention that time was not to be of the essence ab initio (from the beginning).
 
Gopal Sri Ram FCJ stressed that the foregoing was sufficient ground to allow the appeal. Notwithstanding the same, his Lordship stated in the alternative that the fact the respondent did not put an end to the contract when the appellant failed to deliver the unit within the stipulated time but instead continued to make payments and negotiate for delivery led to the conclusion that even if the time had been of the essence when the contract was made, it ceased to be of the essence.  
 
The other two judges of the Federal Court, Mohd Ghazali bin Yusoff FCJ and Zulkefli Makinudin FCJ agreed with the judgment by Gopal Sri Ram FCJ. Zulkefli Makinudin FCJ added that the conduct of the respondent in not immediately electing to rescind the contract after 23 November 1998 and by agreeing to give the appellant extensions of time while making further progress payments showed that time was not intended to be of the essence of the contract. As such, the respondent was only entitled to claim liquidated damages as provided for in the agreement but not to rescind the contract.
 
CONCLUSION
 
Three significant points arise from the Federal Court's decision in the Berjaya Times Square Sdn Bhd v M-Concept Case:
 

It is submitted that the Federal Court may have overstated the requirements of Section 40 by holding that an innocent party may not put an end to the contract if there has been part performance of the contract by the defaulting party. The Court did not consider illustration (a) to that provision, which provides that if A has entered into a contract with B to sing at B's theatre two nights a week for two months, B is entitled to put an end to the contract if A wilfully absents herself on the sixth night. Illustration (a) is inconsistent with the apex court's interpretation of Section 40 and clearly shows that part-performance by a defaulting party does not preclude the innocent party from putting an end to a contract. 
 
It is further submitted that the requirements imposed by the Federal Court have made it extremely difficult for an employer in a construction contract and a purchaser of immoveable property under a sale and purchase agreement (including those in the forms prescribed under the Housing Development (Control and Licensing) Regulations 1989) to terminate the agreement on grounds of the failure by the contractor or the developer to deliver the subject property within the stipulated time.