Rescission is one of the four types of remedies available for claim in the event of a fundamental breach aside from damages, specific performance, and injunction. Here, we provide a comprehensive guide on the rescission of contract in Malaysia.
What is Rescission of Contract in Malaysia?
Rescission is the abrogation or termination of a contract.
Based on the law of contracts in Malaysia, there are two categories of rescission: rescission for breach and rescission ab initio. Knowing the differences between the two is pertinent as they require different circumstances and offer different consequences.
Also, Malaysian courts almost exclusively use the term ‘termination’ for cases of rescission for breach. Meanwhile, the term ‘true rescission’ is used for cases of rescission ab initio.
Grounds of Rescission
Rescission for Breach
- Rescission for breach is applied when an innocent party is given the right to rescind due to the fact that the other party failed to comply or perform the contract. This is stated under sections 40 and 56 (1) of the Contracts Act 1950.
Rescission Ab Initio
- Also perceived as the true rescission, rescission ab initio is applied when there is coercion, fraud, undue influence, or misrepresentation. A party rescinding with the aim of recession ab initio will do so pursuant to sections 19 and 20 of the Contracts Act 1950.
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Consequences of Rescission
Rescission for Breach
- Rescission for breach works prospectively. It has the same effect of cancelling or terminating a contract, ending all future obligations depicted in the agreement. In this case, the innocent party has the right to choose whether to affirm or rescind the contract within a reasonable time.
- Here, the right to damages is preserved.
Rescission ‘Ab Initio’
- Rescission ab initio has the effect of rescinding an agreement retrospectively, which means that the rescission happens from the beginning. This renders the contract voidable, restoring the parties to their initial positions as if the contract had never been formed.
- For rescission ab initio, there is no right to damages. Also, the relief is considered as restitution (the party who wrongfully gained a benefit must restore the benefit).
Exercise of Option to Rescind
Contract Will Not be Terminated Automatically
- By referring to the case, P Palakrishnan a/l Perianana lwn Krishnamoorthy a/l Sinna dan satu lagi  5 MLJ 389, the court held that there is no such thing as automatic termination. Instead, the party who intends to terminate the agreement must clearly state and communicate his intention in writing within a reasonable time.
Rescission Must be Communicated and Exercised Within a Reasonable Time
- In the case Chin Kim & Anor v Loh Boon Siew  1 LNS 69, the purchaser took 4 years to make a clear stand after the breach of the sales and purchase agreement. The court then deemed this not reasonable due to the delay of action from the purchaser.
Option to Rescind Must be Communicated
- In the case, Perkayuan OKS No 2 Sdn Bhd v Kelantan State Ekonomi Development Corp  1 CLJ 761, the court decided that for a termination to be effective, it must provide clear details. An ambiguous or vague termination will not amount to a legal notice.
Option to Rescind is Irrevocable
- By referring to the case Goh Hooi Yin v Lim Teong Ghee & Ors  2 CLJ Rep 48, the court stated that the rescinding party could not revoke his decision and is bound by it.
The Right to Rescind the Contract Must be Waived
- In the case Sim Chio Huat v Wong Ted Fui  CLJ Rep 363, the court conferred the right to the respondent to rescind or affirm since time was the essence of the contract. As the respondent decided to continue the agreement, the time of delivery is no longer important.
All in all, there must be a fundamental breach of a valid contract for rescission to occur. Keep in mind that every case is unique. As such, different types of remedies may work better for different types of breach of contract.
Wondering if rescission of contract in Malaysia is the best course of action for your specific situation? Hire a corporate lawyer and get professional legal services for the benefit of your business.