Discharge by Frustration

Dr. Nuraisyah Chua Abdullah

A contract is frustrated, when, after the contract is made, and
without the default of either party, a change of circumstances
occurs which renders the contract legally or physically
impossible of performance.

The common law doctrine of frustration was evolved to
mitigate the strict rule which insisted on a literal performance of
absolute contracts as laid out in Paradine v.Jane. The courts
recognized that where a contract cannot be carried out any
further due to extraneous factors beyond the control of both
parties, the contract is brought to an end forthwith and both
parties are discharged.

The early cases which developed the doctrine of frustration
include Taylor v. Caldwell where the hire of a musical hall had
to be terminated as the hall was accidentally destroyed by fire
six days before the specified concert dates.
In Lee Seng Hock v. Fatimah binti Zain, the Court of Appeal
referred to the doctrine of frustration which has since received
statutory recognition in s57(2) of the Act. S57 of the Contracts
Act makes no reference to the term frustration but uses the
concept of impossibility and unlawful event. Under s57(1), an
agreement to do an act which is impossible in itself is void. This
is explained in Illustration (a) where an agreement wherein A
agrees with B to discover treasure by magic is void.

S57(2) of the Contracts Act provides for the doctrine of
frustration. Under this section, a contract is frustrated when after
the contract has been made, the act: (i) becomes impossible;
or (ii) unlawful. It should be noted that the supervening act
occurs after the formation of the contract and that it is
something which the promissor could not prevent. The section
provides that the contract becomes void when the
supervening event occurs and the act becomes impossible or
unlawful.
Frustration under s57(2) of Contracts Act.
Under s57(2), for the doctrine of frustration to apply, the
supervening event must be one that occurs after the contract
is made. This requirement underlies the rationale for the
doctrine to allow the parties to be discharged for events
occurring after the contract is formed which are not due to the
fault of either party, thus, disabling the performance promised.

In Goh Yew Chew & Anor v. Soh Kian Tee, the appellant
agreed to construct two building on land belonging to the
respondent. The respondent paid $5,000 to the appellants as
earnest money. It was found that owing to an encroachment
of a neighbor's house into the land it was not possible to
construct the buildings according to the plans. The
respondents took action to claim the return of the $5000. The
trial judge found that in the circumstances it was impossible ab
initio to perform the contract. He held that the respondent was
entitled to the balance of the deposit after deduction of all
reasonable expenses incurred by the appellants.
Frustration occurs after the contract is made.
Under s57(2), the supervening event must be something that
the promisor could not prevent. A frustrating event which was
self induced and caused by a default of a party will not
discharge the party from the contract. In Standard Chartered
Bank v. Kuala Lumpur Landmark Sdn. Bhd, Lim Beng Choon J
set out the law governing frustration as follows:

Frustration not self-induced: event which the promisor could not
prevent
It appears that the language of the section envisages two
main instances of frustration - when a contract to do an act
becomes (a) impossible or (b) unlawful.

The frustration should be caused by some supervening and
subsequent event occuring after the formation of the
contract. Furthermore, it should be some event which the
promisor could not prevent, as a self-induced frustration does
not discharge a party of his contractual obligations.
In Yee Seng Plantations Sdn. Bhd. v. Kerajaan Negeri
Terengganu & Ors, the Court of Appeal held that the doctrine
of frustration is in applicable where there is fault on the part of
the party pleading it. In this case, involving an alienation of
land, the Court held that the refusal of the State Executive
Council to alienate the land in question was a result of the
deliberate act of non-compliance of the consent order by the
party to the first action. It was, thus, not a supervening act.
According to the Court, self-induced frustration is no
frustration.
The Contracts Act does not define the word impossible
provided under s57. Malaysian courts have applied the test
formulated by the House of Lords in Davis Contractors Ltd. v.
Fareham UDC where Lord Radcliff stated;








In this case, the appellants agreed to build for the respondents
78 houses within eight months. For various reasons, the chief of
them being lack of skilled labour, the work took 22 months. The
appellants contended that the contract had been entered
into on the footing that adequate supplies of labour and
material would be available to complete the work within eight
months. However, this was not the case and the resulting delay
amounted to frustration of the contract.

Test for frustration
Frustration occurs whenever the law recognises 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.
The House of Lords held that the contract had not been
frustrated; the fact that there had been unexpected turn of
events which rendered the contract more onerous than had
been contemplated was not a ground for relieving the
contractors of the obligation which they had undertaken.

In The Eugenia, Lord Dening explained:
To see if the doctrine applies, you have to construe the
contract and see whether the parties have themselves
provided for the situation that had arisen. If they had, there is
no frustration and the contract applies. If they have provided
for it, the contract must govern. There is no frustration. If they
have not provided for it, then you have to compare the new
situation with the old situation for which they did not provide.
Then you must see how different it is. The fact that it has
becomes more onerous or more expensive for one party than
he thought is not sufficient to bring about a frustration It must
be positively unjust to hold the parties bound.
Subsequent to the House of Lords decision in Davis Contractors,
there have been other varied formulations of the test for
frustration. In National Carriers Ltd v. Panalpina (Northern) Ltd,
Lord Simon stated:
Frustration of contract takes place when there supervenes an
event (without default of either party and for which the
contract makes no sufficient provision) which significantly
changes the nature (not merely the expense or onerousness)
of the outstanding contractual rights and/or obligations form
what the parties could reasonably have contemplated at the
time of its execution that it would be unjust to hold them to the
literal sense of its stipulation in the new circumstances; in such
case the law declares both parties to be discharged form
further performance.
In J Lauritzen AS v. Wijsmuller BV (The Super Servant Two),
Bingham LJ set out 5 principles of law on frustration:
1. The doctrine of frustration was evolved to mitigate the
rigour of the common laws insistence on literal
performance of absolute performance;

2. The doctrine is not to be lightly invoked and must be kept
within narrow limits since the effect of the doctrine is to kill
the contract and discharge the parties from further liability;

3. Frustration brings a contract to an end forthwith; without
more and automatically;

4. The essence of frustration is that it should not be due to the
act or election of the party seeking to rely on it but must be
due to some outside event or extraneous change of
situation;

5. The frustrating event must be without blame or fault on the
side of the party seeking to rely on it.
In Malaysia, the House of Lords decision in Davis Contractors
was applied by the Federal Court in Ramli bin Zakaria & Ors v.
Government of Malaysia. In this case, the appellants were a
group of 86 vocational schoolteachers who were successful in
their application for teacher training. One of the conditions of
the offer which they accepted was that the teachers would on
completion of the course be accepted as teachers on the UTS
scale. However, by the time they completed their course of
training , the UTS scale had been abolished and the Abdul Aziz
scheme had come into force. The appellants were offered
salaries under the Abdul Aziz scheme.

The appellants claimed that they should have been paid
salaries and allowances under the UTS scheme. The respondent
pleaded that as the recruitment of teachers into the UTS
scheme had been discontinued, the offer to employ them
under the UTS scheme had become frustrated.
The Federal Court held that the service agreement which
contained the provisions of a particular salary scheme was not
frustrated when the new salary scheme was implemented to
replace the old scheme. Abdul Hamid FCJ stated:
In short it would appear that where after a contract has been
entered into there is a change of circumstances but the
changed of circumstances do not render a fundamental or
radical change in the obligation originally undertaken to make
the performance of the contract something radically different
form that originally undertaken, the contract does not
become impossible and it is not discharged by frustration.
There are two provision besides s57 which are related to
frustration. They are examined below as follows: (i) s33 of the
Contracts Act on contingent contracts; and (ii) s12 of the
Specific Relief Act on partial frustration.

Related provisions on frustration
A contingent contract is a contract to do or not to do
something, if some event, collateral to the contract, does or
does not happen, as defined in s32 of the Contracts Act. S33
provides that if the uncertain future event becomes impossible,
the contract becomes void.

This section brings to focus the difference in application
between s57(2) and s33(b) of the Contracts Act. In cases
where as a matter of construction the contract itself contains,
either expressly or impliedly, a term according to which it will
stand discharge on the happening of certain circumstances,
the dissolution of the contract would take place under the term
of the contract and thus, would be outside the purview of s57.

Contingent contract: s33 of Contracts Act.
In Royal Selangor Golf Club v. Anglo Oriental (M) Sdn. Bhd., the
agreement stipulated that if and when the Land Code was
amended to permit the club to grant to the company a lease
of 99 years, the club would do so. The High Court held that the
agreement became void when the Land Code was repealed
by the National Land Code which did not provide for the grant
of a 99 years lease. The contingent event agreed by the parties
has become impossible to perform and thus, the agreement
becomes void under s33(b) of the Contracts Act.

In Nga Sheau Sheau v. United Nerchant Finance Bhd, the High
Court held that both ss57 and 33 were applicable. In this case,
the plaintiff sued as the widow of Chong Sau Nan, the
deceased. The deceased as borrower and he defendant as
lender had entered into a loan agreement whereby the
borrower agreed to take, and the defendant to approve, a
loan subject to a special express condition that the borrower
take up a mortgage reducing term assurance for a sum insured
equivalent to the value and duration of the loan.
After the loan agreement was executed the borrower passed
away without taking up the mortgage assurance. The Court
held that the death of the borrower resulted in the non-
fulfilment and impossibility of the borrower taking up the
mortgage assurance under the express condition. Thus the
agreement was rendered void under s57(2) of the Contracts
Act. Additionally, the contract in question was a contingent
contract and s33 also applied.
S12 of the SRA provides for partial frustration where only a portion of
its subject matter, which existed at the date of contract, has
ceased to exist at the of performance. Following s12,
notwithstanding s57 of the Contracts Act, the contract may still be
performed.

Illustration (a), A contracts to sell a house to B for $10,00. The day
after the contract is made, the house is destroyed by a cyclone. B
may be compelled to perform his part of the contract by paying
the purchase-money. In this case, the sale of the land can still be
performed.

S12 was referred to in Wong Siew Chong Sdn. Bhd. v. Anvest
Corporation Sdn. Bhd. (No. 2). In this case, the subject matter of the
sale and purchase agreement was land measuring 9,377 sq m.
However, 1220 sq m was latter acquired under the Land Acquisition
Act 1960 (Revised 1992). The Court of Appeal referred to s12 and
held that the part acquired was only a small portion of the contract.
The contract can still be performed and the remaining issue was
payment of compensation for the deficiency.

Partial frustration: s12 Specific Relief Act (SRA)
Effect of war: Berney v. Tronoh Mines Ltd (The High Court
agreed with the defendants contention that consequent on
the Japanese occupation of the State of Perak, the contract of
employment between them and the plaintiff was discharged
by frustration.)

Failure to obtain approval: Yong Ung Kai v. Enting (The
defendant entered into a written agreement with the plaintiff
for the sale of timber on land which the defendants tribe had
communal customary rights. In order to cut the timber, a
license or permit from the forest department was necessary.
The defendant did his best to obtain the necessary license, but
this was refused. The High Court held that when the application
was refused, the contract became impossible to perform.)
However, see Dato Yap Peng v. Public Bank Bhd. & Ors [1997] 3
MLJ 484 where the Court of Appeal that a contract dos not
automatically become frustrated by the mere fact that an
approval was not granted by the relevant authorities.

Instances of frustration
Acquisition of land: Yeo Siew Kiow lwn Nyo Chu Alang & Yang
lain. (The High Court held that when the land became the
subject of acquisition by the state authorities, following s57(2),
the agremeent to sell the land bad become invalid and void
when the land was acquired.)

Detention of employee: Sathiaval a/l Maruthamuthu v. Shell
Malaysia Trading Sdn. Bhd (The court held that the
employment contract of the plaintiff was frustrated by the
plaintiffs detention under the Emergency (Public Order and
Prevention of Crime) Ordinance 1969.)

Effect of injection: Shigenori Ono v. Thong Foo Ching & Ors (The
plaintiff agreed to buy property from the third defendant. The
property was in fact subject to an existing tenancy. The tenant
(third party) took out an injunction against the third defendant.
The High Court held that the contract was frustrated as the
effect of the injunction was that the third defendant could not
carry out his obligations under the contract to the plaintiff. )

In Malaysia, relief for frustration is provided in s66 of the
Contracts Act which provides for restoration of advantage
received for agreement discovered to be void and contract
becomes void.

Besides s66 of the Contracts Act, ss 15 and 16 of the Civil Law
Act 1956 also apply. The provision in s57(3) of the Contracts Act
allowing compensation for loss through non-performance of an
act known to be impossible or unlawful should also be noted.

The phrase Contract becomes void in s66 refers to contract
that become impossible or unlawful under s57(2) of the
Contract Act. Under s2(j), a contract which ceases to be
enforceable by law becomes void when it ceases to be
enforceable. Without any enforceable contract, the only relief
is thus restitutionary which is provided in s66 of the Contracts
Act. Under s66, any person who has received any advantage
under a contract becomes void is bound to restore it, or to
make compensation for it, to the person from whom it was
received.


Effect of, and Relief for frustrated contracts
Illustration (d) in s66 gives an instance of a singer , A, who
contracts to sing for B for $1000. A receives $1000 paid in
advance from B. A is too ill to sing and is required to restore the
$1000 received in advance although A is not bound to make
compensation to B for the loss of profits caused to B due to As
inability to sing.

In Lee Seng Hock v. Fatimah bte Zain, the agreement for the
sale and purchase of land was held to be frustrated under
s57(2) of the Contracts Act when the land was required by the
government. The remaining issues was the appellants claim for
compensation awarded under the Land Acquisition Act 1960.
The court stated:
since wh have already ruled that such agreement is now
void under s57(2) of the Act, the respondent cannot claim any
right to such compensation. At most, he is entitled to be
refunded the 10% deposit he had paid to the respondent
under s66 of the Act It is for this reason that the appellant is
entitled to be refunded the 10% deposit he had made to the
respondent pursuant to clause 1 of the agreement.
Unlike the Contract Act which makes no reference to
frustration s15(1) of the Civil Law Act uses both terms,
contract impossible of performance and frustrated contract.

S15(1) provides that when a contract becomes impossible of
performance or has been otherwise frustrated, the parties are
discharged form further performance of the contract.
Subsection 15(2) to 15(6) of the Civil Law Act provide for the
adjustment of the rights and liabilities of parties to the frustrated
contract.

S15(2) provides that in the case of sums so paid, they are
recoverable as money received for the use of the party whom
the sums were paid, while sum payable cease to be payable.
This means that money which had been paid to any party
before the happening of the event of frustration is recoverable.
For sum which are payable, they no longer need to be paid.
Section 15(2) applies to money paid or payable. Where parties
have conferred benefits other than money before the time of
discharge, s15(3) provides for the recovery of such valuable
benefit.
However, the recovery is not as of right but is subject to the
Courts discretion ad the Court considers just, not exceeding
the value of the said benefit, having regard to all the
circumstances of the case.

It should be noted that for relief whether for sums paid or
payable, or for the recovery of valuable benefit, the Court is
also to have regard to the amount of expenses that may be
incurred by the parties before the frustrating event. This is
provided in the proviso to s16(2) and in s16(3)(a).

S15(2) was applied in by the Federal Court in National land
Finance Co-Operative Society v. Sharidal Sdn. Bhd. to refund
the deposit as money had and received as the contract had
become void upon the refusal of the Foreign Investment
Committee to approve the sale of the immovable property.

In United Asian Bank v. Chun Chai Chai, the High Court held that
the plaintiffs tenancy agreement with the defendant was
frustrated when the plaintiffs had difficulty in obtaining
electricity. According to Lembaga Lektrik Negara, the basic
infrastructure was not sufficient and a substation had to be
constructed. The court held that the requirement of a substation
was so fundamental as to strike at the root of the tenancy
agreement and render a significant change in the obligations
of the party from what was contemplated by them. Therefore,
the plaintiffs were entitled to a refund of sums paid under the
agreement following s15 of the Civil Law Act.

S16 provides that ss15 and 16 applies to contract whether
made before of after the coming into force of this Act. It also
applies to contracts to which the Government is a party but
certain contracts are excluded in s16(5), that is, a charter party,
contract of insurance and certain contracts for the sale of
goods.
Thank you for your attention