Misrepresentation

Discharge by FrustrationDr. Nuraisyah Chua AbdullahA 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 preventIt 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 frustrationFrustration 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: The doctrine of frustration was evolved to mitigate the rigour of the common laws insistence on literal performance of absolute performance;

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;

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

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;

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 frustrationA 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 frustrationAcquisition 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 contractsIllustration (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