Understanding the Implications of Abandoned Contracts

There are two situations in which a contract can be considered abandoned.

The first is when both parties have conducted themselves in a way that suggests an implied agreement to abandon the contract. In this scenario, it’s clear that both parties have abandoned the contract.

The second situation occurs when one party’s conduct leads the other to reasonably believe that the contract has been abandoned, and as a result, may have significantly altered his position. Even if there was no intention to mislead, this is irrelevant, as the situation prohibits the denial of an abandonment.

• Paal Wilson & Co A/S v Partenreederei Hannah Bluementhal The Hannah Bluementhal [1983] 1 AC 854

It is important to note that a mere delay or lapse of a reasonable time before asserting one’s right is not necessarily fatal, but an inordinate lapse of time will give rise to the implication of abandonment.

• Pearl Mill Co v Ivy Tannery Co [1919] 1 KB 78

What Happens to an Abandoned Contract?

Primary obligations are specific duties and responsibilities that are set out under the contract. For example, A’s obligation to deliver goods at a specific time and B’s obligation to make payment after the delivery of goods.

Secondary obligations come into play when a fundamental breach of a contract occurs, resulting in its termination. In this situation, the secondary obligations replace the primary obligations and require the breaching party to compensate the innocent party for any losses suffered due to the failure to perform the primary obligations.

• Photo Production Ltd. Respondents and Securicor Transport Ltd. Appellants [1980] A.C. 827

When a contract is abandoned, parties are released from the primary and secondary obligations under the contract.

But if a contract is terminated due to a fundamental breach, the primary obligations are extinguished but the secondary obligation to pay compensation remains.

• Yeong Oon Kong & Anor v Lee Chu Ming and Ors [2010] MLJU 1564

Parties Estopped from Enforcing Abandoned Contracts

In Takashimaya Construction & Development Sdn Bhd & Anor v MY Influx Sdn Bhd and other appeals [2020] 6 MLJ 289, the Court of Appeal held that parties are estopped from enforcing the primary or secondary obligations under an abandoned contract.

The case involved the appellants, who were the owner and developer of a piece of land. The respondents were purchasers under separately signed sales and purchase agreements (SPA). According to the SPA, the 2nd appellant was supposed to build eight blocks of 7 and 1/2-storey shop-houses.

However, for economic reasons, one of the Respondents’ representatives proposed a joint venture agreement for a 15-storey shop-building instead. Although the parties agreed to proceed, the joint venture agreement was never signed.

Unfortunately, the substituted project did not materialise.

Five years after the SPA’s completion date, the respondents tried to reassert their rights under the SPA.

The Court of Appeal opined that there was a clear abandonment of the SPA, and as a result, the parties were estopped from asserting their rights in relation to the same:

“[104] The plaintiffs’ decision and actions to proceed with the 15 storey building and keeping silent for five years, and letting the completion date of the project under the SPAs 2007 lapse, are certainly conduct amounting to an abandonment of the SPAs 2007 and 7 1/2 storey building by election…

[106]  Hence, whether the estoppel is by way of abandonment, encouragement, representation, waiver or election, it applies across the board from the facts in the present appeal. From the conduct of the plaintiffs, they are now estopped from asserting the validity of the SPAs 2007.”