The recent landmark decision of the Federal Court in Yong Toi Mee & Anor v Malpac Capital Sdn Bhd & Anor (Civil Appeal No. 02(f)-69-10/2012(A), 4 September 2013) has established important principles governing the rights and obligations of parties to a contract which has been suspended by mutual agreement.
In Yong Toi Mee, the appellants and the respondents had entered into three agreements dated 5 April 2002 (the “composite agreements”) for the sale and purchase of the entire paid up capital of the second respondent, as well as machinery and mill owned by the first respondent. The composite agreements were subject to conditions precedent such as the obtaining of approval from the relevant authorities to complete the sale and purchase.
The required approvals were not obtained within the time specified in the composite agreements. On 15 November 2002, the respondents wrote a letter (“the Letter”) to the appellants stating, among other things:-
“that for the moment, each of us shall be entitled but reserved our respective rights to terminate the overall arrangement and understanding (including the Shares Agreement of 5 April 2002 which lapsed on 5 October 2002 since all relevant approvals have not been obtained) to enable each of us to consider our respective positions.“
The appellants subsequently attempted to complete the sale by tendering the balance purchase price, which was rejected by the respondents. The appellants then gave the respondents notice to complete the sale, which the respondents refused.
As a result, the appellants commenced a claim against the respondents seeking specific performance of the composite agreements, wherein the respondent counterclaimed that the composite agreements were void. After full trial, the High Court allowed the appellant’s claim and ordered specific performance, but this decision was reversed by the Court of Appeal. According to the Court of Appeal, the conditions precedent remained unfulfilled, and the composite agreements had been suspended to enable the parties to consider their respective positions, and remained suspended as there was no evidence that the suspension had been lifted. As such, the appellant could not compel specific performance of the composite agreements.
The appellants argued that the effect of the Letter was to give the respondents more time to obtain the necessary approvals, and as such the time for completion of the conditions precedent became at large, while giving the parties a choice to terminate the agreement. The respondents however argued that the composite agreements had lapsed, and the Letter was a “suspension agreement” which reserved the parties’ rights to renegotiate the sale between the parties due to the delay and other then prevailing circumstances.
The Federal Court allowed the appellant’s appeal and ordered specific performance of the composite agreements. According to the court, the Letter meant that the parties could not at that point in time move forward to perform the composite agreements as the conditions precedent were not satisfied, and “the parties could take stock of their own position and in so doing thereafter elect to terminate at will, a right that was given to either party.” Further, “the letter anticipated a time when parties would eventually decide whether to pursue or not with the composite agreements due to the allegation that the conditions precedent had not being fulfilled.”
However, the Federal Court went on to observe that the respondents had never asserted that the composite agreements were void due to the failure to fulfill the conditions precedent. The court was of the view that “the major conditions precedent” had been obtained by August 2003, and the respondents only attempted to serve notice of termination of the composite agreements at the end of November 2007. The court was of the view that “with no more formal impediment of performance outstanding, the reason for the parties to terminate the composite agreements had evaporated.” As the court remarked:-
With the conditions precedent satisfied what remained thereafter was performance. We see no reason why the respondents could validly resist the decree of specific performance after the impediments had been cleared in the circumstances of the case. The raison d’ etre or reason for the contents of the 15.11.2002 letter vanished with the fulfillment of the conditions precedent.
The Federal Court then briefly considered and answered the legal questions raised by the appellant for which leave to appeal was given. Unfortunately, the Federal Court did not provide any reasoning at all in giving those answers. It would appear that based on the answers given by the Federal Court, the principles of law established from this case may be stated as follows:-
- Sections 32 to 34 of the Contracts Act 1950, dealing with “Contingent Contracts”, apply to suspended contracts containing conditions precedent to be fulfilled.
- If a sale and purchase agreement containing conditions precedent has been suspended by mutual agreement, the contract shall not take effect unless and until the conditions precedent are fulfilled, and neither party to the agreement may resile from the agreement until it could be definitely ascertained that the condition could not be fulfilled: National Land Finance Co-Operative Society Ltd v Sharidal Sdn Bhd [1983] 2 MLJ 211, FC; Ideal City Development v. Dynamic Mould [2003] 3 MLJ 152, CA. However, the parties may agree that either party shall have the right to nevertheless terminate the agreement at any time prior to the fulfillment of the conditions precedent.
- Where a contract has been suspended by mutual agreement of the parties, time for performance is also thereby suspended.
- Where a contract between parties has been mutually suspended as opposed to being terminated, all contractual obligations thereunder are likewise suspended until revival of the contract or its earlier termination.
- The affirmation of the suspended contract by one of the parties in the aftermath of the suspension revives the contract for purposes of specific performance, “subject to the lifting of the suspension by the other party”. (It is not sure whether this means that the other party must consent to the lifting of the suspension. On the facts of Yong Toi Mee, it can hardly be said that the respondents agreed to lift the suspension and continue with the contract, yet specific performance was ordered. This arguably means that a party may, by his words or conduct, be taken to have lifted or agreed to the lifting of the suspension i.e. a classic example of estoppel by conduct.)
- A vendor under a contract for sale whose obligation is to fulfill the conditions precedent can not take advantage of his own failure to say that time has run out following a temporary suspension of the contract.
In relation to the principles of law laid down by the Federal Court in this case, it is interesting to note that the Federal Court appears to have assumed, without deciding, that parties to a contract can in all cases competently and lawfully suspend the operation of a contract by mutual agreement.
However, it should be noted that in this case, suspension was only possible because the conditions precedent were regarded as contingent conditions, and the entire sale and purchase agreement did not become operative until those conditions were fulfilled. It is very much possible in such cases to ascertain the point in time where the parties can decide whether or not the contingency has materialized.
On the other hand, it is not clear whether parties to a contract may simply suspend the operation of a contract which has become unconditional. The decision of the Federal Court does not address this issue, and in any event the court did not give any guidance as to (i) how a suspension may be properly effected, (ii) how the contract may be properly “revived” or (iii) how the suspension should be properly “lifted”.
In reality, any suspension of the rights and obligations of the parties to a contract cannot be for an indefinite period, which may be lifted as and when the parties so please. This is because any suspension carries the risk of serious adverse effects on various issues of real financial significance (such as accumulation of interest, inability to dispose or deal with property affected by the contract, third parties whose rights will affected by any suspension etc.) In practice, parties to complex commercial agreements specifically address the issue of possible suspension of agreements in the form of force majeure or “material adverse change” (MAC) clauses, with clear provisions governing the circumstances in which the contract may be suspended or even terminated, the duration of any suspension, and the effect on the major rights and obligations of the parties during such period of suspension.
In this regard, it may be said that the decision of the Federal Court in Yong Toi Mee highlights the risks and dangers involved when the parties to a contract fail to handle any intended suspension of their contract with great care.