FRUSTRATIONIMPOSSIBILITY OF PERFORMANCE What is frustration O The

FRUSTRATIONIMPOSSIBILITY OF PERFORMANCE –

What is frustration? O The doctrine of frustration operates in situations where it is established that due to subsequent change in circumstances, the contract is rendered legally or physically impossible to perform by an event not due to the act or default of either party. O The parties to the contract are discharged from further performance of the contract. (no breach)

O S. 57(2) CA O The courts in Malaysia have recognized that under S. 57(2), a contract can be frustrated and discharged without breach or default of either parties. O Case : HA Berney v Tronoh Mines[1949]MLJ 4

HA Berney v Tronoh Mines[1949]MLJ 4 O The court held that the invasion of Malaya by the Japanese frustrated the performance of the contract and therefore there was no breach of contract by the Defendants.

O For frustration to apply, it is necessary to prove that the parties have made no provision for such events in their contract. O where the parties have themselves provided for the situation that has arisen, the provisions that they have made for the situation in the contract applies, hence no frustration.

Guan Aik Moh (KL) Sdn Bhd v Selangor Properties Ltd [2007] 4 MLJ 201 O Gopal Sri Ram JCA - there are three elements woven into the fabric of the doctrine of frustration: O First, 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.

Guan Aik Moh (KL) Sdn Bhd v Selangor Properties Ltd [2007] 4 MLJ 201 O Second, the event relied upon by the promisor must be one for which he or she is not responsible. Put shortly, selfinduced frustration is ineffective. O Third, 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.

(1) Act becomes impossible to perform O Illust (b), (d), & (e) to S. 57 O Impossible = difficult? O What if the act becomes difficult to perform?

Pacific Forest Industries Sdn Bhd v Lin Wen-Chih [2009] 6 MLJ 293 O If the act becomes difficult to perform—no frustration. O “. . . 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. . . ” O The appellants ('defendants') referred two questions to the Federal Court for determination. 1. 2. whether it was open to an appellate court to find that a contract had been frustrated, notwithstanding the fact that frustration had not been pleaded earlier whether the doctrine of frustration recognised the failure of the parties to a concluded contract… when the contract is in a manner 'consistent with the prevailing market price'.

(2) Event happens after formation of contract O Illust. (d) S. 57 O Event was subsequent to the formation of the contract. O Not necessary that the event is unforeseen or unexpected or not contemplated by the parties; as long as they have made no provision in their contract for such future event.

(3) No frustration where promisor had prior knowledge of impossibility OIllust c OS. 57(3)

(4) Provisions in the contract intended to have effect O Where the parties have provided for the situation that has arisen, then the provisions in the contract applies — No frustration. O Case : Chan Buck Kia v Naga Shipping & Trading Co Ltd [1963] MLJ 159

Chan Buck Kia v Naga Shipping & Trading Co Ltd [1963] MLJ 159 O A time charter party contained a provision that ‘if for any reason whatsoever the vessel shall be detained at any port by any authority having dominion over the port, the charterer shall continue to pay the charter hire. ’

Chan Buck Kia v Naga Shipping & Trading Co Ltd [1963] MLJ 159 O The Indonesian Govt detained the ship when it sailed into an Indonesian port until the end of charter period. O Plaintiff (the ship owner), claimed from the defendant (hirers) the hire charges. O Defendant pleaded frustration.

Held: O The provision was intended to have effect in the circumstances that had arisen in this case; full effect should be given to it. O The defendant must pay the hire charges for the whole period of the time charter party. O Please also read : Sentul Raya Sdn Bhd v Hariram a/l Jayaram [2008] 4 MLJ 852

INSTANCES OF FRUSTRATION 1. 2. 3. 4. 5. 6. 7. 8. Outbreak of war Destruction of the subject matter Non-occurrence of a particular event Death or Incapacity for Personal Service Statutory Prohibition Inability of promisor to obtain licence Grant of Injunction Seizure or compulsory acquisition by the government

INSTANCES OF FRUSTRATION O (1) Outbreak of war O Refer to the case of HA Berney v Tronoh Mines[1949]MLJ 4

(2) Destruction of the subject matter -specific object essential for performance of the contract O The destruction of the specific object essential for performance of the contract will frustrate it. O Case : Taylor v Caldwell (1863)

Taylor v Caldwell (1863) O Def agreed to let to the pl the use of his music hall & garden for the purpose of entertainment. O Before the day of the performance arrived, a fire destroyed the music hall. O The def, through no fault of his own, was unable to perform the contract (letting the hall to pl)

Held : O The contract was frustrated. O Parties had contracted on the basis of the continued existence of the music hall at the time when the concerts were to be given, that being essential to their performance. O The music hall having ceased to exist without the fault of either party, both parties are excused.

Appleby v Myers (1867) LR 2 CP 651 O P undertook to erect machinery upon the D’s premises, the work to be paid for upon completion. O When the work was almost completed both the premises and the machinery already erected were destroyed by fire. O Held: O the contract was frustrated; however, the plaintiff could recover nothing for the work done since the obligation to pay didn’t arise until completion.

(3) Non-occurrence of a particular event O The non-occurence of a specified event may frustrate the contract. Compare the leading cases*: O Krell v Henry [1903] 2 KB 740 O Herne Bay Steamboat Co v Hutton [1903] 2 KB 683 O *both cases arose from the delayed coronation of Edward VII

Krell v Henry [1903] 2 KB 740 O Henry hired a room from Krell for two days in order to view the coronation procession of Edward VII, but the contract itself made no reference to that intended use. O The King’s illness caused a postponement of the procession. O Def refused to pay for the room.

Held: O The contract was frustrated. Henry was excused from paying the rent for the room. The holding of the procession on the dates planned was regarded as the foundation of the contract. O For the contract to be frustrated in this way, all commercial purpose must have been destroyed. If there is some purpose to be found in the contract then it will continue.

(4) Death or incapacity for personal service O applies to contracts for personal services, e. g. contracts of employment. O Illust (e) to S. 57 O Case : Sathiaval a/l Maruthamuthu v Shell Malaysia Trading Sdn Bhd [1998] 1 CLJ Supp 65 O Employee’s inability to continue with his employment with the employer due to 2 year detention of the employee by the police under the Emergency Ordinance rendered the employment contract frustrated.

(5) Statutory prohibition O Where a performance of the contract is prohibited by a statutory order O Case : Metropolitan Water Board v Dick Kerr [1918] AC 119. O Respondent in 1914 agreed to construct for appellants a reservoir within 6 years. In Feb 1916, Minister of Munitions ordered the respondent to cease work and to disperse and sell the plant.

(6) Inability of promisor to obtain licence O Where the nature of the contract necessitated getting a licence for its performance O Case : Yong Ung Kai v Enting [1965] 2 MLJ 98

Yong Ung Kai v Enting O Def entered into an agreement with the pl to sell to pl the right to cut and take out certain timber. O A licence from the forest dept was required. O The agreement did not refer to the necessity of obtaining a licence. O Def did his best to get a licence but the dept refused to grant one. O Pl sued for breach of contract. O Held : Refusal to grant a licence made the contract legally impossible to perform.

(7) Grant of an injunction O Case : Standard Chartered Bank v Kuala Lumpur Sdn Bhd [1991] 2 MLJ 251 O Case : Kuala Lumpur Landmark Sdn Bhd v Standard Chartered Bank [1994] 2 MLJ 559 O The decision was reversed on appeal. O Issue : whether the injunction restraining both pl & def from acting on the redemption agreement had rendered it impossible of performance within the t&c of the agreement. O Held: the injunction on the Monsia suit did not frustrate the agreement.

(8) Seizure or compulsory acquisition by the government O Case : Public Finance Bhd v Ehwan bin Saring [1996] 1 MLJ 331 O Respondent purchased a motorcar via hire- purchase agreement. O 6 weeks after the execution of the agreement, the Customs & Excise Dept seized & forfeited the motorcar for an alleged offence.

Public Finance Bhd v Ehwan bin Saring O Held : O seizure by the Dept made it impossible for the appellants to assign & make over all its rights, benefit & interest in the vehicle. O Appellants have defective title, hirepurchase agreement become void under S. 57(2).

INSTANCES OF NO FRUSTRATION O (1) Events causing carriage of goods by sea more expensive O Case : Tsakiroglou & Co Ltd v Noblee Thorl GMBH [1962] AC 93 O The case concerned a sale of groundnuts, c. i. f. , * from Port Sudan to Hamburg. O The parties envisaged shipping through the Suez Canal, but the canal was closed after the contract was concluded. O [*CIF contracts (cost insurance freight) are the most common form of contract for sale of goods to be supplied by sea A CIF contract is a type of contract wherein the price includes cost, insurance and freight charges. ] O

Held: O the contract was not frustrated as the ship could go round via the Cape of Good Hope (there being no implied term that carriage was to be via Suez). O The greater cost of the freight, borne by the c. i. f. seller, was not so great as to render this a fundamentally different adventure.

(2) Shortage of labour and materials in building contracts O Case : Davis Contractors Ltd v Fareham UDC O App agreed to build 78 houses within 8 months for the resp for a fixed sum of £ 94 k. O Owing to unexpected shortage of skilled labour and certain materials, the contract took 22 months instead of 8 months to complete and cost £ 115 k. O App contended that there was frustration of the contract and claimed quantum meruit for the actual cost incurred. O HOL : no frustration. The fact that the contract became more onerous or expensive to the app did not discharge the agreement.

(3) Occurrence of bad weather O Case : Kwan Sun Ming v Chak Chee Hing [1965] 1 MLJ 236 O This was an action for damages for breach of contract or alternatively damages for negligence arising out of a contract to tow 303 logs from Kampong Abai to Sandakan. O The defence was that the 253 logs were lost in a storm so violent as to amount to an "act of God" and the defendant should be excused from all liability for damages.

Kwan Sun Ming v Chak Chee Hin O The learned judge held that although there was a storm it was not a storm violent enough to be regarded as an "act of God" and gave judgment against the defendant and awarded the plaintiff damages based on the cost at which the logs were purchased. O Federal Court held that there was no justification for interfering with the finding of the learned trial judge on the question whether the storm amounted to an "act of God" because his finding was based on all the evidence given in this case.

Kwan Sun Ming v Chak Chee Hin O “A feature of both those definitions is that the event must be one which could not have been foreseen and which could not have been guarded against. It is obvious that in a towage contract of this nature a storm must be expected and would have to be guarded against, especially in the open sea. The appellant would therefore be bound as part of his contract to take all precautions necessary against storms that might reasonably be foreseen. For a storm at sea to be regarded as an act of God it would have to be a storm that could not have been reasonably foreseen in the circumstances…”

Case : Khoo Than Sui v Chan Chiau Hee [1976] 1 MLJ 25 O The plaintiff and the defendant had entered into a verbal contract whereby the defendant agreed to tow the plaintiff's logs from Sungei Sugut to his log pond at Sandakan. O The defendant towed a total of 82 logs but only 11 logs were delivered. O The plaintiff claimed damages for the loss. O The defences of the defendant were (a) act of God and (b) frustration. O It was alleged that the logs were lost in a storm at sea.

Held: O (1) the storm which was encountered was not violent enough to be regarded as an act of God; O (2) in a towing contract of this nature a storm must be expected and would have to be guarded against and therefore the defence of frustration must fail.

(4) Compulsory acquisition by government of small part of land O Case : Wong Siew Choong Sdn Bhd v Anvest Corporation Sdn Bhd [1999] 3 MLJ 577 O Resp purchased a piece of land measuring 9377 sq metres from the app. O Before the completion of the sale, the govt acquired 1200 sq metres of the said land under the Land Acquisition Act 1960. O Held (FC) : O the portion acquired was only a small portion of the said land. The contract was not fundamentally altered by the compulsory acquisition of a minor portion of the land. The contract was not frustrated.

(5) Difficulty in interpreting the terms of the contract O Case : Pacific Forest Industries Sdn Bhd v Lin Wen-Chih [2009] 6 MLJ 293 O There was a dispute as to the price that was to be fixed for the sale of the timber products. O The price agreed was at ‘a price consistent with the prevailing market price’ O Held (Co. A ): because the parties could not agree as to the ‘prevailing market price’ which was a fundamental term, the agreement was frustrated.

Pacific Forest Industries Sdn Bhd v Lin Wen-Chih O Held (FC) : O The agreement was not frustrated as there was no impossibility of interpreting the parties’ intentions. It may be difficult, but not impossible or incapable.

THE TEST FOR FRUSTRATION O ‘Radical change from obligation’ test O The court will not hold the parties to further performance of the contract if in the light of the changed circumstances there would be a radical change in their obligations under the contract. O This test was adopted by the majority of the House of Lords in: O Case : Davis Contractors v Fareham UDC [1956] AC 696.

Davis Contractors v Fareham UDC [1956] AC 696. O A building, which was supposed to take 8 months to complete, took 22 because of unexpected labour shortages. The contractors claimed that their contract was partially frustrated but the court disagreed. O The delay "was not any new state of things which the parties could not reasonably be thought to have foreseen. "

Davis Contractors v Fareham UDC [1956] AC 696 O The court also stated that "frustration is not to be lightly invoked as the dissolvent of a contract. . It is not hardship or inconvenience or material loss itself which calls the principle of frustration into play. 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 test for frustration – cont’d O The former Federal Court in the following case has applied the radical change in the obligation test. O Case : Ramli bin Zakaria v Government of Malaysia [1982] 2 MLJ 257 O The appellants were a group of 86 vocational school teachers who were successful in their application for teacher training. O One of the conditions of the offer which was accepted was that the teachers would on completion of the course be accepted as teachers on the UTS scale. O By the time they completed their course of training the UTS scale had been abolished and the Abdul Aziz scheme came into force.

Ramli bin Zakaria v Government of Malaysia [1982] 2 MLJ 257 O The appellants were offered salaries under the Abdul Aziz scheme. O The appellants claimed that they should have been paid salaries and allowances under the UTS scheme. O The respondent pleaded that as the recruitment of teachers into the UTS had been discontinued the offer to employ them under the UTS had become frustrated. O The learned trial judge dismissed the claim of the appellants and they appealed to the Federal Court.

Held: O (1) where after a contract has been entered into there is a change of circumstances but the changed circumstances do not render a fundamental or radical change in the obligation originally undertaken to make the contract something radically different from that originally undertaken, the contract does not become impossible and it is not discharged by frustration;

Held: O (2) in this case it is wrong to say that the contract was not capable of being performed and it was not therefore frustrated. On the acceptance of the Abdul Aziz recommendations the Government put into force an improved salary scale and this was applicable to the appellants. Thus the UTS was abolished and ceased to apply to the appellants. After that the appellants were given a higher commencing salary and a more favourable scale than that of UTS.

SELF-INDUCED FRUSTRATION O when a person deliberately renders performance impossible. O Thus, in cases where the promisor himself is responsible for the frustrating event, such self-induced frustration does not discharge a party from his contractual obligations. O He will be liable for breach of contract if he does not perform his obligation under the contract.

Case : Maritime National Fish v Ocean Trawlers [1935] AC 524 O Maritime chartered from Ocean a vessel which could only operate with an otter trawl*. O Both parties realised that it was an offence to use such a trawl without a government licence. O Maritime was granted three such licences, but chose to use them in respect of three other vessels, with the result that Ocean's vessels could not be used. *A large commercial fishing trawl which uses kite like wooden boards at the corners of the mouth of the net.

Held: O the charterparty had not been frustrated. Consequently Maritime was liable to pay the charter fee. O Maritime freely elected not to licence Ocean's vessel, consequently their inability to use it was a direct result of their own deliberate act.

Case : Yee Seng Plantations Sdn Bhd v Kerajaan Terengganu [2000] 3 MLJ 699 O The appellant was the sub-lessee of certain lands in Kerteh Terengganu. O In the years 1984 and 1986, the government of the state of Terengganu acquired some of the land. O The appellant took out an action challenging the acquisition. O The State Legal Adviser represented the defendant (government). O Following negotiations between the appellant's solicitors and the State Legal Adviser, the action was compromised and the agreement was recorded in the form of a consent order.

Yee Seng Plantations Sdn Bhd v Kerajaan Terengganu O However, difficulty arose when the state authority, ie the State Executive Council ('the Exco') decided to reject the appellant's application for the alienation of the land referred to in the consent order. O The respondents/government commenced an action seeking for a declaration that they were not bound by the terms of the consent order. The decision of the Exco was a supervening event over which the respondents had no control. As such the consent order was frustrated.

Yee Seng Plantations Sdn Bhd v Kerajaan Terengganu O The High Court agreed with the respondents' argument and granted the relief sought by them. The appellant appealed. O The issues before the court were inter alia; whether the consent order had become frustrated;

Held: O It is well settled that the doctrine of frustration has no room where there is fault on the part of the party pleading it. O In the present case, the refusal of the Exco to alienate the land in question was a deliberate act of non-compliance of the consent order by a party to the first action. O It was not a supervening event at all. In these circumstances, it was not open to the respondents to rely on the doctrine.

Case for further reading : O Dato Yap Peng v Public Bank Bhd [1997] 3 MLJ 484 O Lai Kok Kit @ Sulaiman bin Abdullah v MBf Finance Bhd [2000] 3 MLJ 136

CONSEQUENCES OF FRUSTRATION O The contract becomes void. O S. 57(2) : The contract is terminated as to the future only. It is not void from the very beginning. O S. 66 : Remedy of restitution

CONSEQUENCES OF FRUSTRATION O Case : Public Finance Bhd v Ehwan bin Saring [1996] 1 MLJ 331 O Pursuant to s 57(2) of the Contracts Act 1950, the agreement had become void, and the appellants were obliged to return the RM 57, 000 to the respondent under s 66 of the Contracts Act 1950.

S. 15(2) & (3) Civil Law Act 1956 : Remedy of restitution O S. 15 (2) CLA – The right to recover money paid O Q: What happens to the sums paid before the time of discharge? A : recoverable. O Q: What if the party has incurred expenses in the performance of the contract before the time of discharge? A : he may retain the whole or any part of the sum already paid, but not in excess of the expenses incurred.

S. 15(2) & (3) Civil Law Act 1956 : Remedy of restitution O Q: What happens to the sums payable before the time of discharge/frustration? O A: it ceases to be payable. The party may however recover the incurred expenses ie the whole or any part of the sum payable, but not in excess of the expenses incurred.

Case : National Land Finance Cooperative Society Ltd v Sharidal Sdn Bhd [1983] 2 MLJ 211 O The respondents had agreed to sell and the appellants had agreed to buy certain immoveable property. O It was a condition of the agreement that the sale should be subject to the approval of the Foreign Investment Committee. O In the event the Foreign Investment Committee refused its approval but suggested that the property be transferred to a joint venture company of which at least 30% of its equity is held by Bumiputras.

National Land Finance Co-operative Society Ltd v Sharidal Sdn Bhd O The respondents contended that the agreement became void when the Foreign Investment Committee refused to approve the sale, while the appellants maintained that the agreement did not become void but still subsisted because there was a conditional approval.

National Land Finance Co-operative Society Ltd v Sharidal Sdn Bhd O The learned trial judge held that the agreement became void and he made a number of consequential orders, inter alia, that the appellants deposit to be refunded under s. 15(2) CLA. O Federal Court affirmed the trial judge’s decision.

Case : Yong Ung Kai v Enting [1965] 2 MLJ 98 O The court applied s 1(2) of the Law Reform (Frustrated Contracts) Act 1943 since the Act is a statute of general application which was applicable to Sarawak. The CLA was extended to Sarawak on 1 April 1972. O The court ordered the defendant to return to the plaintiff the moneys advanced to him under the terms of the agreement.

S. 15 (3) CLA – Compensation for partial performance O to prevent injustice of the doctrine of entire contracts & to prevent unjust enrichment of one party at the expense of the other. O this subsection is applicable where one party has obtained valuable benefit other than payment of money (to which s. 15(2) would apply) before the time of discharge- the other party may recover the value of the said benefit as the court considers just, having regard to all the circumstances of the case. O Q: how to assess the value of the benefit? O A: the value of the benefit after the frustrating event.

OQ: What is the position of English Law on frustration?

Common law O Until the nineteenth century the common law adopted a doctrine of absolute obligation to perform a contract. Thus, the parties were bound to perform any obligation that they had undertaken even though performance had subsequently become impossible. O Refer Paradine v Jane (1647) Aleyn 26, 82 ER 897

Paradine v Jane (1647) Aleyn 26, 82 ER 897 O During the English Civil War, the Royalist forces took possession of land owned by the plaintiff, Paradine, which was under lease to the defendant, Jane. O Paradine sued Jane for three years back rent, and Jane defended himself by asserting that he was not in possession of the land for the time in question.

Held: O Jane was still liable for the rent as the parties had committed themselves to the lease, and if they had wanted to provide for the avoidance of liability in certain situations, they could have done so in the terms of the contract itself. O Furthermore, the court reasoned, if the lessee was to have the advantage of profiting from the use of the land, he should bear the losses which may occur from the use of the land as well.

Common law O This unsatisfactory state of the law led to the English courts gradually employing an implied term device/test/theory declaring such contracts void. O Case : Taylor v Caldwell (1863) 3 B&S 826 O Blackburn J has formulated the basic principle of frustration to alleviate the harshness of the absolute obligation doctrine.

Chandler v Webster [1904] 1 KB 493 O D agreed to let a room to the P to view the coronation process. O The rent was £ 141 15 s payable immediately. O P paid £ 100. O He still owed the balance of £ 41 15 s. O Later the contract was discharged by frustration when the procession was abandoned. O P sued to recover the £ 100 paid by him as on total failure of consideration, and D counterclaimed for the sum of £ 41 15 s.

Chandler v Webster O Held : O P not only has no right to recover the £ 100 paid, but must pay £ 41 15 s as it was a contractual obligation due before the moment of frustration. O This rule was unsatisfactory and harsh. A party has to pay the full price of the contract even though he has not received anything under the contract.

Common law O After 1943 O HOL in Fibrosa Spolka Akcyjna v Fairbairn Lawson Combe Barbour Ltd [1943] AC 32 obviated the harshness of the rule in Chandler v Webster when it ruled that payments made before the frustrating event may be recovered where there has been a total failure of consideration.

Common law O Decision in Fibrosa however did not remove every hardship as; O there can be no recovery of advance payment where there was partial consideration. O payee may be called to repay the money on the ground of total failure of consideration, whereas he may have incurred expenses in partial performance of the contract. O The English legislature responded with the enactment of the Law Reform (Frustrated Contracts) Act 1943.