Consider the following scenario: A, a famous Elvis impersonator, contracts B to make a pair of blue suede shoes for the purposes of an Elvis exhibition event in which he is engaged to perform. A pays B a sum of RM1,000.00. B delivers suede shoes to A but they are red in colour, not blue. A is not paid his engagement fee of RM2,000.00 because in the words of the organizers, “blue suede shoes.” A then sues B for breach of contract.
At this juncture, the issues can be considered in their proper context. B has committed a fundamental (or repudiatory or serious) breach of contract, because he failed to deliver blue suede shoes to A. A is thus entitled to terminate the contract. A must then choose between one of two remedies: either damages (RM2,000.00 being the fees which A would have received but for B’s breach), or restitution (RM1,000.00 being the refund of the money paid by A to B for the shoes). He cannot have both.
If A is awarded damages, this is on the basis that the damages of RM2,000.00 are foreseeable and not too remote. If A is awarded restitution, this is on the basis of total failure of consideration for the payment of RM1,000.00. Principles governing remedies are wholly separate considerations from principles governing breach. To state the obvious, it is wrong to say B was in breach of contract or that A is entitled to terminate the contract because there was a total failure of consideration.
For the longest of time, it was well established that the test for total failure of consideration is not whether the promisee has received a specific benefit, but rather whether the promisor has performed any part of the contractual duties in respect of which the payment is due: Stocznia Gdanska SA v Latvian Shipping Co and others [1998] 1 All ER 883, HL.However, the doctrine of total failure of consideration under Malaysian law is arguably now in a state of disarray as a result of two relatively recent decisions of the Federal Court.
In Berjaya Times Squares Sdn Bhd (formerly known as Berjaya Ditan Sdn Bhd) v M Concept Sdn Bhd [2010] 1 MLJ 597; [2010] 2 AMR 205, FC, Gopal Sri Ram FCJ sought to discuss the doctrine of total failure of consideration, and at para [18] went on to cite the test in Stocznia above. However, he then “restated” the test for total failure of consideration as follows:-
“In other words … The test is not whether the innocent party received anything under the contract. The test is whether the party in default has failed to perform his promise in its entirety.”
It should immediately be noted that there is a world of a difference between the proposition “if the promisor has performed any part of the contract, there is no total failure of consideration”(Stocznia) and the proposition “if the promisor has performed the contract in its entirety, there is no total failure of consideration” (Berjaya).
Why was the test re-stated in this manner? The answer is arguably to be found at para [24], where it becomes apparent that the “restatement” of the test for total failure of consideration by Gopal Sri Ram FCJ was done with the intention of equating the doctrine of total failure of consideration with the test for breach of contract under section 40 of the Contracts Act 1950 (“When a party to a contract has refused to perform, or disabled himself from performing, his promise in its entirety, the promisee may put an end to the contract, unless he has signified, by words or conduct, his acquiescence in its continuance“).
The decision in Berjaya has been subjected to scathing criticism: see, for example, Sinnadurai, Law of Contract (4th Edition, 2011) at paragraphs [12.91] to [12.104]. For present purposes, it is respectfully submitted that Berjaya erroneously conflated principles governing remedies with principles governing breach, which has brought uncertainty to the principles governing total failure of consideration as a restitutionary remedy. The Federal Court’s attempt in Berjaya to introduce “total failure of consideration” as a test for breach of contract or rescission is unprincipled and wrong, and it would appear that this approach has not been endorsed by subsequent decisions of the Federal Court dealing with breach of contract, such as Damansara Realty Bhd v Bungsar Hill Holdings Sdn Bhd & Anor [2011] 6 MLJ 464 (see below) as well as Sime Hok Sdn Bhd v Soh Poh Sheng [2013] 2 MLJ 149, FC.
In Damansara Realty Bhd v Bungsar Hill Holdings Sdn Bhd & Anor [2011] 6 MLJ 464; [2012] 1 AMCR 193, FC, while not necessary for its decision, the court distinguished Berjaya on the facts. However, in doing so the Federal Court in Damansara Realty appears to have proceeded on the wrong premise, in that it assumed, without detailed consideration, that Berjaya was correct in the first place to regard total failure of consideration as being part of the test for terminating a contract for breach. The Federal Court then observed at para [58]:
“In Berjaya Times Square Sdn Bhd it was held as long as some work has been done indicating that the development or construction had commenced, there would be no total failure of consideration because the promise had been performed although not in its entirety. On the facts of that case the decision may be supportable. But we do not agree with the stand that there can be no total failure of consideration so long as part of the promise has been fulfilled.”
The Federal Court then proceeded to state at para [60]:
“… the principle should therefore be this. There is a total failure of consideration (and a failure to perform a promise in its entirety) where a reasonable and commercially sensible man would look upon the project of having little or no value at all. If the reasonable and commercially sensible man sees the performance of the contract of having some value, it should be taken that there has been no total failure of consideration and accordingly the promise has been performed in part. In the earlier instance, there is a right to terminate the contract, but not in the latter instance.” (Emphasis added)
It is immediately clear from the last sentence in the above quoted passage that the Federal Court in Damansara Realty was also labouring under the (mistaken) view that total failure of consideration is the test for terminating a contract for breach; this is also supported by the reference to “failure to perform a promise in its entirety” in brackets after the words “total failure of consideration”. For the reasons given earlier, it is respectfully submitted that the reasoning is fundamentally flawed because it proceeds on a wholly false premise to begin with.What is of greater concern is that the Federal Court sought to introduce a new test for total failure of consideration, viz “where a reasonable and commercially sensible man would look upon the project of having little or no value at all“. This test focuses on the benefits received by the promisee, and not the degree of performance by the promisor tested against the purpose of the contract, contrary to the test laid down in Stocznia and established principles governing total failure of consideration. It should be noted that the Federal Court did not even refer to Stocznia or any of the established authorities relating to total failure of consideration.
More importantly, it is respectfully submitted this test is unprincipled and difficult to apply in practice because:-
- there is no objective standard by which one can determine what are the characteristics of the fictitious “reasonable” and “commercially sensible” man;
- there is no objective standard by which one can determine what amounts to “some value” and how or why it should be considered of “value”, and
- the danger in resorting to an artificial legal construct to determine whether there has been total failure of consideration, in other words asking whether “a reasonable and commercially sensible man would look upon the project as having some value”, is that the court is wholly disregarding the terms of the contract between the parties and the express purpose(s) for which the contract was entered into. It is impermissible for the court to rewrite the bargain between the parties by an ex post facto artificial analysis of what a hypothetical, artificial legal construct would regard as “having some value”.
We now return to the example of A and B above. On the authority of Stocznia, A will be entitled to a refund of RM1,000.00 because the contract was for the delivery of blue suede shoes required by an Elvis impersonator, no more and no less. However, on the authority of Damansara Realty, A will not be entitled to a refund because a “reasonable” and “commercially sensible” man does not have the idiosyncratic hobby of impersonating Elvis, and will find “some” “value” in having a pair of suede shoes, regardless of what colour they may be in, since it is impossible to say there is no value in a pair of shoes when you can walk in them. A may not even be able to recover his fee of RM2,000.00. Surely this cannot be right as a matter of principle.
It is hoped that the Federal Court will be able to revisit this issue in the near future as the principles governing total failure of consideration now appear to have been set on a wrong path as a result of Berjaya and Damansara Realty. While it may be argued that the observations of the Federal Court in Damansara Realty as to the test for total failure of consideration are merely obiter, the problem here is that the other ‘test’ laid down by the Federal Court in Berjaya can hardly be said to be a better alternative at all.