FRUSTRATION OF FRUSTRATION OF CONTRACTCONTRACT

Recall that …Recall that …A party may be discharged from his contractual obligations in any of the following ways;PERFORMANCEFRUSTRATIONAGREEMENTBREACH

CONCEPT OF FRUSTRATIONCONCEPT OF FRUSTRATION

Frustration occurs whenever a contract, after its formation, becomes impossible to perform without default of either party; the doctrine is often called subsequent or supervening impossibility, and its effect is that the parties are released from their contractual obligations.

Until the 19th century the common law adopted a doctrine of absolute obligation to perform a contract, hence in,

Paradine v Jane (1647) Aleyn 26; (ABSOLUTISM)

When the party by his own contract creates a duty or charge upon himself, he is bound to make it good, if he may, notwithstanding any accident by inevitable necessity, because he might have provided against it by his contract. And therefore, if the lessee covenant to repair a house, though it be burnt by lightning, or thrown down by enemies, yet it ought to repair it.

Effect mitigatedEffect mitigated

The basic principle of frustration was formulated to alleviate the harshness of the absolute obligation doctrine by Blackburn J in:

Taylor v Caldwell (1863) 3 B & S 826

Underlying TheoriesUnderlying Theories

(a) The implied term theory-the contract will be discharged only where the court can imply a term into the contract that the contract shall come to an end upon the occurrence of the events in question.

(b) The just solution theory- the contract is discharged by the operation of law; otherwise the parties would have to perform a contract radically different from that originally undertaken.

Definition of Frustration Definition of Frustration under the MCA,1950under the MCA,1950Sec 57 (2) 0f the Contract Act 1950

provides for the doctrine of frustration:“A contract to do an act which, after the

contract is made, becomes impossible or by reason of some event which the promisor could not prevent, unlawful, becomes void when the act becomes impossible or unlawful.”

The section envisages 2 main instances of frustration, namely:

(a) Impossibility of performance; and(b) Unlawful to perform.

In both instances, the contract is frustrated and becomes void. The phrase ‘becomes void’ means that the ‘frustrated’ contract started as a valid contract but comes to an end and becomes void upon the happening of the frustrating event.

Although the parties are freed from performing their future obligations under the frustrated contract; they must still perform their obligations that arose before the frustrating event.

Three Major elementsThree Major elements Gopal Sri Ram JCA in Guan Aik Moh (KL) Sdn Bhd v

Selangor Properties Bhd, stated that there are three elements woven into the fabric of the doctrine of frustration:

1)the event upon which the promisor relies as having frustrated the contract must have been one for which no provision has been made in the contract. If provision has been made then the parties must be taken to have allocated the risk between them.

2)The event relied upon by the promisor must be one for which he or she is not responsible. Self induced frustration is ineffective.

3)The event which is said to discharge the promise must be such that renders it radically different from that which was undertaken by the contract. The court must find it practically unjust to enforce the original promise. If any of these elements are not present on the facts of a given case, then s 57 does not bite.

In Malaysia, the period after the Japanese of Malaya marked the development of the law of frustration.

Starting with HA Berney v Tronoh Mines, the courts in Malaysia have recognized that under sec 57 (2), a contract can be frustrated and discharged without breach or default of either parties.

ACT BECOMES IMPOSSIBLE TO ACT BECOMES IMPOSSIBLE TO PERFORM PERFORM

Such impossibility occurs when the act becomes physically impossible of performance or when the contract becomes legally impossible or unlawful to perform. Illustrations (b), (d) and (c) to section 57 show instances where the contract to do an act becomes impossible.

However, there is no frustration where the act becomes difficult to perform.

Pacific Forest Industries Sdn Bhd v Lin Wen-Chih

Pacific Forest Industries Sdn Bhd v Lin Wen-Chih, Zaki Azmi CJ reiterated:

‘A contract does not become frustrated merely because it becomes difficult to perform. If a party has no money to pay his debt, it cannot be considered impossible to perform as it is not frustration. Neither can he plead frustration because the terms of the contract make it difficult to interpret. If it cannot be performed or becomes unlawful to perform, then the party who is to perform his part of the bargain can plead frustration. The doctrine of frustration is only a special case to discharge a contract by an impossibility of performance after the contract was entered into. A contract is frustrated when subsequent to its formation, a change of circumstances renders the contract legally or physically impossible to be performed.’

The contract will not be frustrated unless its foundation has been destroyed so that the performance becomes impossible or fundamentally different from what was agreed. It is not enough that the contract has become more onerous or expensive to perform.

Read the following cases: Tsakiroglou & Co Ltd v Noblee & Thorl

GMBH [1962] AC 93 Davis Contractors Ltd v Fareham UDC

[1956] AC 696

EVENT HAPPENS AFTER FORMATION OF EVENT HAPPENS AFTER FORMATION OF THE CONTRACTTHE CONTRACT

Frustrating event should take place after the parties made the contract; that is, the event was supervening or subsequent to the formation of the contract. For frustration to apply, it is not necessary that the supervening event is ‘unforeseen’ or ‘unexpected’ or ‘not contemplated’ by the parties. All that is necessary is that the parties have made no provision for such future events in their contract.

NO FRUSTRATION WHERE PROMISOR HAD PRIOR KNOWLEDGE OF IMPOSSIBILITY

If at the time of making the contract, the promisor knew or might have known that the promise was physically impossible or unlawful to perform, there is no frustration.

Section 57 (3)/see illustration (c).

PROVISIONS IN THE CONTRACT PROVISIONS IN THE CONTRACT INTENDED TO HAVE EFFECTINTENDED TO HAVE EFFECT

Where the parties have themselves provided in the contract for the situation that has arisen, then the provisions in the contract applies. There is no frustration.

Sentul Raya Sdn Bhd v Hariram a/l Jayaram

INSTANCES OF INSTANCES OF FRUSTRATIONFRUSTRATIONInstance Case

1. Outbreak of War HA Berney v Tronoh Mines

2. Destruction of the Subject matter

Taylor v CaldwellAppleby v Myers

3. Non-occurrence of a particular event

*Krell v Henry*Chandler v Webster

4. Death or incapacity for personal service

*Nga Sheau Sheau v United Merchant Finance Bhd*Condor v Barron Knight Ltd [1966] 1 WLR 87

5. Statutory Prohibition Metropolitan Water Board v Dick, Kerr & Co Ltd [1918] AC 119

6. Inability of Promisor to Obtain License

*Yong Ung Kai v Enting*Ho Weng Leong v Ng Kee Chin

7. Grant of an injunction *Standard Chartered Bank v Kuala Lumpur Sdn Bhd

8. Seizure of compulsory acquisition by the government

Public Finance Bhd v Ehwan bin SaringRe Shipton

INSTANCES OF INSTANCES OF NONO FRUSTRATIONFRUSTRATION

Instances Case

1. Event causing carriage of goods by sea more expensive

Tsakiroglu &Co. Ltd v Noblee Thorl GmbH [1962] AC 93

2. Financial crisis Sentul Raya Sdn Bhd v Hariram a/l Jayaram [2008] 4 MLJ 852

3. Shortage of labour and materials in building contracts

Davis Contractor Ltd v Fareham UDC [1959] AC 696,

4. Occurrence of bad weather

*Kwan Sun Ming v Chak Chee Hing, [1965] 1 MLJ 236*Khoo Than Sui v Chan Chiau Hee [1976] 1 MLJ 25

5. Compulsory acquisition by the government of small part of the land

Wong Siew Choong Sdn Bhd v Anvest Corp Sdn Bhd [1999] 3 MLJ 577

6. Difficulty in interpreting the terms of the contract

Pacific Forest Industries Sdn Bhd v Lin Wen-Chih, [2009] 6 MLJ 293

Take Home AssignmentTake Home AssignmentRentap is a skilled carver of ‘Belian wood’ furniture. In January 2010, he entered into a contract with Van Der from Germany to supply hundred (100) items of ‘Belian wood’ furniture. The furniture are to be delivered in two batches, one in March and the other in August. In June 2010, German signed an International Convention banning the import of a rare type of ‘Belian wood’ from Sarawak with immediate effect. This is the type that Rentap uses for his furniture. Because of the burst of negative publicity about the ‘Belian wood’, Van Der terminated his contract with Rentap at the end of June. With reference to the above situation discuss whether the doctrine of frustration could be invoked by Van Der.

THE TEST FOR THE TEST FOR FRUSTRATIONFRUSTRATION

RADICAL CHANGE IN THE RADICAL CHANGE IN THE OBLIGATION TESTOBLIGATION TEST The appropriate test to apply to determine

whether a contract has been frustrated is that of a ‘radical change in the obligation.’

Lord Radcliffe in Davis Contractors v Fareham UDC said:

“Frustration occurs whenever the law recognizes that without default of either party a contractual obligation has become incapable of being performed because the circumstances in which performance is called for would render it a thing radically different from that which was undertaken by the contract…There must be as well such a change in the significance of the obligation that the thing undertaken would, if performed, be a different thing from that contracted for.”

THE MALAYSIAN SCENERIOTHE MALAYSIAN SCENERIO

Ramli Zakaria v Government of Malaysia [1982] 2 MLJ 251

Abdul Hamid FJ said:“Where after a contract has been entered

into there is change of circumstances but the changed circumstances do not render a fundamental or radical change in the obligation originally undertaken to make the performance of the contract something radically different from that originally undertaken, the contract does not become impossible and it is not discharged by frustration.”

Kin Nam Development Sdn Bhd v Khau Daw Yau [1984] 1 MLJ 256

Salleh Abas CJ said: “It occurs in a situation where due to a change of

circumstances a contract is rendered legally and physically impossible of performance. The doctrine is an exception to the general rule as to an absolute contract in that a person who specifically undertakes an absolute obligation cannot afterwards claim to be absolved from liability by the fact that his failure to perform the obligation is due to the occurrence of an event over which he has no control. The doctrine does not apply just because the promisor’s obligation has become, because of change of circumstances, more onerous than what he has contracted for.”

SELF INDUCED FRUSTRATION SELF INDUCED FRUSTRATION

Promisor liable for self induced frustration

The essence of frustration is that it should not be due to the act or election of the promisor that defeated the contract. Where the promisor himself is responsible for the frustration event, such self induced frustration does not discharge him from his contractual obligations.

He will be liable for breach of contract if he does not perform his obligations under the contract.

Maritime National Fish Ltd v Ocean Trawlers Ltd [1935] AC 524

Yee Seng plantation Sdn Bhd v Kerajaan Negeri Terengganu [2000] 3 MLJ 699

Lai Kok Kit @ Sulaiman Abdullah v MBF Finance Bhd [2000] 3 MLJ 136

THE EFFECT OF THE DOCTRINE OF THE EFFECT OF THE DOCTRINE OF FRUSTRATIONFRUSTRATION

The contract becomes void

Remedy of restitution under section 66

Public Finance Bhd v Ehwan Saring [1996] 1 MLJ 4

Remedy of restitution under s 15(2) and (3) of the Civil Law Act 1956-in pari materia with Section 1 (2) &(3) of the English Law Reform (Frustrated Contracts) Act 1943.

At common lawAt common law

The case of Chandler v Webster in particular provoked much judicial criticism and was eventually overruled to some extent.

The HOL in Fibrosa Spolka Akcyjna v Fairbain Lawson Combe Barbour Ltd [1943] AC 32

Thus, the position was improved, but was still unsatisfactory for 2 reasons:

(i) The party who had returned the prepayment might have incurred expenses but would be entitled to nothing (as in the Fibrosa)

(ii) If the party seeking to recover the pre-payment had received any part of what he bargained for, no matter how small e.g. 1% of the machinery in the Fibrosa, there would be no total failure of consideration.

An attempt to deal with these difficulties led to the enactment of: THE LAW REFORM (FRUSTRATED CONTRACTS) ACT 1943.

In the Sarawak case of, Yong Ung Kai v Enting [1965] 2 MLJ 98, the court followed the above decision.

Goh Yew Chew v Soh Kian Tee [1970] 1 MLJ 138, Ali FJ point out the difference between frustration of the contract and the doctrine of failure consideration.

The right to recover money paid and the The right to recover money paid and the right to set-off expenses against pre right to set-off expenses against pre paymentpayment

The Law Reform (Frustrated Contracts) Act 1943-s.1 (2)

The Civil Law Act 1956-s.15 (2)

“All sums paid and payable to any party in pursuant of the contract before the time when the parties were so discharged…shall, in the case of the sums so paid, be recoverable from him as money received by him for the use of the party by whom the sums so paid, and, in the case of sums so payable, cease to be so payable:

Provided that if, the party the sums were so paid or payable incurred expenses before the time of discharge in, or the purpose of, the performance of the contract, the court may, if it consider it just to do so having regard to all circumstances of the case, allow him to retain, or the case may be, recover the whole or any part of the sums so paid or payable, not being an amount in excess of the expanses so incurred.”

There are 3 main points to be made about section 1(2)/15 (2):

It applies only when there has been pre payment or agreement to make a pre payment

It embodies the rule in The Fibrosa in terms of recovering pre payment, but it is not now necessary to prove total failure of consideration

It goes further than The Fibrosa in that it gives the court a discretionary power to permit the payee to set-off against the sum paid or payable a sum not exceeding the value of any expenses incurred in performing the contract before frustration occurred.

Restitution of benefit other than money where there has been partial performance

Sections 1(3) /15 (3) represent an attempt to deal with the difficulties created by cases like Appleby v Myer

“where any party to the contract has, by reason of anything done by any other party thereto in, or for the purpose of, the performance of the contract, obtained a VALUBLE BENEFIT (other than the payment of money) before the time of discharge, there shall be recoverable from him by the other party such sum (if any), not exceeding the value of the said benefit to the party obtaining it, as the court considers just, having regard to all the circumstances of the case in particular:

The amount of any expenses incurred before the time of discharge by the benefited party in, or for the purpose of, the performance of the contract, including any sums paid or payable by him to any other party in pursuance of the contract and retained or recoverable by that party under section 1 (2) ,and

The effect, in relation to the said benefit, of the circumstances giving rise to the frustration of the contract.”

Effectively, either party may be awarded compensation in respect of any non monetary valuable benefit conferred by him upon the other party in pursuance of the contract.

This involves a 2 stage This involves a 2 stage process:process:

(a) Identification and valuation of the ‘valuable benefit’ which will set the upper limit of any ‘just sum’ award.BP Exploration Co (Libya) Ltd v Hunt (No. 2) [1982] 1 All ER 125

(b) Calculation of the just sumBrown and Root (Labuan) Sdn Bhd v Pada Sdn Bhd [1987] 1 MLJ 239.