DISCHARGE BY FRUSTRATIONINTRODUCTION • Contract is discharged by frustration, where, after the contract is formed, events beyond the control of both parties make it impossible to continue with the contract. • Thus, the contract is terminated by law forthwith and both parties are discharged. 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 1 (1647) Aleyn 26. • The courts recognised 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 Caldwel (1863) 32 LJQB 164. 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 Chandler v Webster 3 [1904] 1 KB 493 and Krell v Henry [1903] 2 KB 740 , the facts in both cases were similar: both involved the rental of rooms to watch the coronation processions which were cancelled. These events were beyond the control of both parties and discharged the contracts. • Under the Contracts Act, the term "frustration" is not used. However, the courts have applied English cases on frustration in interpreting • S 57(2) of the Contracts Act which has been accepted as providing for the doctrine of frustration. • In Lee Seng Hock v Fatimah binti Zain [1996] 3 MLJ 665, CA at 673 the Court of Appeal referred to "the doctrine of frustration which has since received statutory recognition in s 57(2) of the Act [the Contracts Act]". • This chapter will examine: (i) frustration under s 57(2) of the Contracts Act; (ii) the test for frustration; (iii) related provisions on frustration; (iv) instances of frustrating events; and (v) effect of, and relief for frustration. FRUSTRATION UNDER SECTION 57(2) CONTRACTS ACT • Section 57 of the Contracts Act provides as follows: (1) An agreement to do an act impossible in itself is void. (2) 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. • (3) Where one person has promised to do something which he knew, or, with reasonable diligence, might have known, and which the promisee did not know, to be impossible or unlawful, the promisor must make compensation to the promisee for any loss which the promisee sustains through the non-performance of the promise. • Section 57 of the Contracts Act makes no reference to the term "frustration" but uses the concept of impossibility and unlawful event. • Under s 57(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. • Section 57(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 promisor could not prevent. • This is shown in Illustration (b) where A and B contract to marry each other. After the contract and before the time fixed for the marriage, A goes mad. The contract becomes void. • Section 57(2) provides that the contract becomes void when the supervening event occurs and the act becomes impossible or unlawful. it should be noted that contract becomes void is a different category from voidable contracts (where the innocent party has the option to affirm or rescind a contract vitiated for lack of consent or for a serious breach of contract). • In a contract that is frustrated. in cases of frustration. relief is provided under s 66. . The distinction is important as the statutory reliefs provided in ss 65 and 66 of the Contracts Act makes clear reference to these terms. • Thus. the law treats the contract to be terminated automatically and forthwith due to the frustrating event. • It is also different from void agreements which are unenforceable by law due to unlawful consideration or object and in some cases of mistakes.• Section 2 (j) of the Contracts Act provides that "a contract which ceases to be enforceable by law becomes void when it ceases to be enforceable". to emphasise the key concepts contained in the Contracts Act set out earlier in the introductory chapter to this book. a contract that becomes void under s 57(2). In this respect. • Section 65 applies to voidable contracts while s 66 applies to agreement "discovered to be void" or "when a contract becomes void". thus. The trial judge found that in the circumstances it was impossible ab initio to perform the contract. disabling the performance promised.000. . Azmi LP stated: The doctrine of frustration is relevant only when there is a change of circumstances after the formation of the contract which renders it physically or commercially impossible to fulfil and it does not concern itself as in this case with the initial impossibility which renders a contract void ab initio. the supervening event must be one that occurs "after the contract is made". FC . He held that the respondent was entitled to the balance of the deposit after deduction of all reasonable expenses incurred by the appellants. The respondent paid $5. • In Goh Yew Chew v Anor v Soh Kian Tee [1970] 1 MLJ 138. • The Federal Court affirmed the trial judge's decision.000 to the appellants as earnest money. for the doctrine of frustration to apply. The respondent took action to claim the return of the $5. It was found that owing to an encroachment of a neighbour's house into the land it was not possible to construct the buildings according to the plans. 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. Frustration occurs "after the contract is made" • Under s 57(2). the appellants agreed to construct two buildings on land belonging to the respondent. Lim Beng Choon J set out the law governing frustration as follows: The relevant law relating to discharge of contract by frustration is encompassed in section 57(2) of the Contracts Act 1950. The frustration should be caused by some supervening and subsequent event occurring after the formation of the contract. . Furthermore. • A frustrating event which was self induced and caused by a default of a party will not discharge the party from the contract. as a 'self-induced frustration' does not discharge a party of his contractual obligations. the supervening event must be something that "the promisor could not prevent".. It appears that the language of the section envisages two main instances of frustration . it should be some event which the promisor could not prevent..when a contract to do an act becomes (a) impossible or (b) unlawful. • In Standard Chartered Bank v Kuala Lumpur Landmark Sdn Bhd [1991]2 MLJ 251. Frustration not self-induced: "event which the promisor could not prevent" • Under s 57(2) of the Contracts Act. not a supervening act. During the negotiations leading up to the charter party. thus. they had not provided for it. It was. According to the Court. CA. 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. . the Court of Appeal held that the doctrine of frustration is inapplicable where there is fault on the part of the party pleading it. The charterers claimed that the charter party had been frustrated by the blocking of the canal. In this case. involving an alienation of land. both parties realised that there was a risk that the Suez Canal might be closed. CA. • The English Court of Appeal held that the doctrine of frustration was inapplicable to the present facts because.• In Yee Seng Piantantions Sdn Bhd v Kerajaan Negeri Terengganu & Ors [2000] 3 MLJ 699. In The "Eugenia". "self-induced frustration is no frustration". where she became trapped due to the canal being blocked. as the Government of Egypt had nationalised the Suez Canal and there was the possibility that English and French forces might be sent to seize the canal. • The Court referred to Ocean Tramp Tankers Corporation v VIO Sovfracht (The "Eugenia") [1964] 1 All ER 161. they came to no agreed terms to meet that possibility. the owners of the Eugenia let her to the charterers "for a trip out to India via the Black Sea". The vessel embarked on its journey and subsequently entered the Suez Canal. although the parties foresaw that the Suez Canal might become impassable. however. TEST FOR FRUSTRATION • The Contracts Act does not define the word "impossible" provided in s 57. But that is not so.. but rather that the parties have made no provision for it in their contract . not so much because the supervening event was unexpected. because the two parties had not made provision for it: It has frequently been said that the doctrine of frustration only applies when the new situation is "unforeseen" or "unexpected" or "uncontemplated".. but more importantly. It was the very thing that they feared. the parties foresaw that the canal might become impassable. It is not so much that it is "unexpected". here.• Lord Denning emphasised that the doctrine of frustration applies. AIR 1954SC44. But they made no provision for it. In the Indian Supreme Court decision of Sayabrata Ghbse v Mugneeram Bangur & Co. as if that were an essential feature. . Mukherja J explained the word "impossible" as follows: This much is clear that the word 'impossible' has not been used here in the sense of physical or literal impossibility. it can very well be said that the promisor finds it impossible to do the act which he promised to do. . For various reasons. this was not the case and the resulting delay amounted to frustration of the contract. • However. 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. most Malaysian cases have applied the test formulated by the House of Lords in Davis Contractors Ltd v Fareham UDC [1956] AC 696. • In this case. the work took 22 months. HL. the appellants agreed to build for the respondents 78 houses within eight months. However.• Performance of an act may not be literally impossible but it may be impracticable and useless from the point of view of the object and purpose which the parties had in view and if an untoward event or change of circumstances totally upsets the very foundation upon which parties rested their bargain. where Lord Radcliffe stated: 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 chief of them being lack of skilled labour. There is no frustration. Then you must see how different it is. If they have not provided for it. the contract must govern. then you have to compare the new situation with the old situation for which they did provide. • The test in Davis Contractors was explained by Lord Denning in The "Eugenia" discussed above as follows: To see if the doctrine applies..• The House of Lords held that the contract had not been frustrated. The fact that it has become more onerous or more expensive for one party than he thought is not sufficient to bring about a frustration . there is no frustration and the contract applies. you have first to construe the contract and see whether the parties have themselves provided for the situation that had arisen. It must be positively unjust to hold the parties bound. If they had.. If they have provided for it. the fact that there had been an 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. .. there have been other varied formulations of the test for frustration. in such case the law declares both parties to be discharged from further performance. In National Carriers Ltd v Panalpina (Northern) Ltd.[1964] 1 All ER 161 at 166. it did not pass the test in Davis Contractors Ltd [1956] AC 696. HL that is.• In The "Eugenia". the Court of Appeal held that the doctrine of frustration did not apply as it was self-induced."18 [19811 AC 675. . HL. the event had caused the performance of the contract "a thing radically different from-that-which was undertaken by the contract". • Subsequent to the House of Lords decision in Davis Contractors. • Further. • Lord irnon sated: Frustration of contract takes place when the supervening event (without default of either party and for which the contract makes no sufficient provision) which so significantly changes the nature (not merely the expense or onerousness) of the outstanding contractual rights and/or obligations from 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. The frustrating event must be without blame or fault on the side of the party seeking to rely on it. CA. 5. . 3. 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. at 8. Frustration brings a contract to an end forthwith. Bingham LJ set out five principles of law on the doctrine of frustration as follows: 1. 2. 4.• In J Lauritzen AS v Wijsrnuller BV (The "Super Servant Two") [1990] 1 Lloyd's Rep 1. The doctrine of frustration was evolved to mitigate the rigour of the common law's insistence on literal performance of absolute performance. without more and - automatically. Ibid. 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. as they had entered into other contracts which they could only perform using Super Servant One. FC. The issue which arose was whether the contract was frustrated due to the loss of Super Servant Two. The appellants were offered salaries under the Abdul Aziz scheme. namely Super Servant One or Super Servant Two. However. The Court of Appeal held that the loss of Super Servant Two was not a supervening event such as to frustrate the contract. the UTS scale had been abolished and the Abdul Aziz scheme had come into force. However. which they had elected not to do. the defendants contracted to carry the plaintiffs' drilling rig from Japan to a delivery location off Rotterdam by one of two transportation units. to use Super Servant One to perform the contract after Super Servant Two had sunk. . 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 school teachers who were successful in their application for teacher training. • In Malaysia. by the time they completed their course of training. [1982] 2 MLJ 257. The defendants then informed the plaintiffs that they would not carry out the transportation of the drilling rig. namely. 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. The defendants had intended to use Super Servant Two for this contract. In this case. as the defendants had an alternative. Super Servant Two sank. CA. • In Lai Kok Kit @ Sulaiman Lai bin Abdullah MBf Finance Bhd [2000] 3 MLJ 136. 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 appellants claimed that they should have been paid salaries and allowances under the UTS 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 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 Court of Appeal referred to s 57(2) of the Contracts Act and Ramli Zakari's case and accepted the test stated by Abdul Hamid FJ therein to be "an accurate proposition governing the law of frustration" . the contract does not become impossible and it is not discharged by frustration.. • 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. RELATED PROVISIONS ON FRUSTRATION • There are two provisions besides s 57 which are related to frustration. They are examined below as follows: • (i) s 33 of the Contracts Act on contingent contracts. Contingent contract: Section 33 of Contracts Act • Section 33 of the Contracts Act provides as follows: (a) Contingent contracts to do or not to do anything if an uncertain future event happens cannot be enforced by law unless and until that event has happened. and (ii) s 12 of the Specific Relief Act on partial frustration. such contracts become void. . (b) If the event becomes impossible. is more than a mere essential stipulation of the contract. [198312 MLJ 211. It is. however. a condition which is known in the law of contract as a contingent condition. in our judgment. nor guarantee that such approval would be given. • In this case.• Section 33 of the Contracts Act was applied by the Federal Court in National Land Finance Co-operative Society Ltd v Sharidal Sdn Bhd [1983] 2 CU 76. . [1983] 2 CU (Rep) 282. There was no promise. a breach of which entitles an innocent party to regard itself as discharged from further performance and to sue for damage. the effect of which is that a contract shall not take effect unless and until the condition is fulfilled. FC. Such a condition. Salleh Abas CJ (Malaya) stated: It is therefore obvious that the parties have entered into a contract of sale contingent upon the approval of the transaction by the FIC over which the parties had no control. and approval was not obtained. where the sale and purchase of a property was subject to the approval of the Foreign Investment Committee (FIC). In this case. As the approval in this case was refused.Until the FIC approval was given. the club would do so. • National Land Finance Co-operative Society Ltd's case was followed in Royal Selangor Golf Club v Anglo-Oriental (M) Sdn Bhd [1990] 1 CU 995. 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. ie suspended although neither the respondents nor the appellants could reside from it until it could be definitely ascertained that the condition could not be fulfilled. . 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. • In Nga Sheau Sheau v United Merchant Finance Bhd [2004] 3 CLJ 243 the High Court held that both ss 57 and 33 were applicable. [1990] 2 MLJ 163. it means that contingent event becomes impossible and the agreement therefore becomes void in accordance with s 33(b) of the Contracts Act. the agreement becomes void under s 33(b) of the Contracts Act. [1990] 3 CU (Rep) 37. In this case. The contingent event agreed to by the parties has become impossible to perform and thus. This is the effect laid down by s 33(a) of the Contracts Act. the deceased. the plaintiff sued as the widow of Chong Sau Nan. liability for further performance remained unenforceable. CA both sections were referred to and the Court of Appeal held that the contract was frustrated by s 57(2) when the land in question was compulsorily acquired. the contract in question was a contingent contract and s 33 also applied. • Additionally. Thus the agreement was rendered void under 57(2) of the Contracts Act. In Lee Seng Hock v Fatirnali bte Zain [1996] 3 M[J 665. 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. After the loan agreement was executed the borrower passed away without taking up the mortgage assurance. . and the defendant to approve.• The deceased as borrower and the defendant as lender had entered into a loan agreement whereby the borrower agreed to take. 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. The contract can still be performed and the remaining issue was payment of compensation for the deficiency. 1. The Court of Appeal referred to s 12 and held that the part acquired was only a small portion of the contract. notwithstanding s 57 of the Contracts Act. • Following s 12. has ceased to exist at the time of performance. CA. a contract is not wholly impossible of performance because a portion of its subject-matter existing. which existed at the date of contract.377 sq m.220 sq m was later acquired under the Land Acquisition Act 1960 (Revised 1992) Act 486. at its date. • Section 12 of the Specific Relief Act provides for partial frustration where only a portion of its subject matter. has ceased to exist at the time of the performance. However. 1950. the contract may still be performed. In this case. Partial frustration: Section 12 of Specific Relief Act • Section 12 of the Specific Relief Act provides as follows: Notwithstanding anything contained in section 57 of the Contracts Act. . • Section 12 was referred to in Wong Slew Chong Sdn Bhd v Anvest Corporation Sdn Bhd (No I) 34 [2002] 3 MLJ 143. the subject matter of the sale and purchase agreement was land measuring 9. (iv) failure to obtain approval. the contract Of employment between them and the plaintiff was discharged by frustration. (v) failure to obtain loan. Effect of war and fire • An example of frustration due to war is given in Illustration (d) in s 57: "A contracts to take in cargo for B at a foreign port. The contract becomes void when war is declared. • The courts have referred to s 57 of the Contracts Act and also applied the test in Davis Contractors to decide the matter. and (viv) effect of injunction. ." In Berney v Tronoh Mines Ltd [1949] MLJ 4 the plaintiff sued for breach of a contract of service. A's Government afterwards declares war against the country in which the port is situated. (iii) acquisition of land. (viii) seizure of goods by customs department. (ii) change in the law. Some instances of frustration are set out below as follows: (i) effect of war and fire. The High Court agreed with the defendants' contention that consequent on the Japanese occupation of the State of Perak. INSTANCES OF FRUSTRATION • There are many cases that have raised the issue of frustration. (vi) economic crisis. (vii) detention of employee. had been destroyed in a fire at a factory of the borrowing company. the subject matter of the leasing agreement. The High Court applied the test in Davis Contractors and held that on a true construction of the leasing agreement. The charge documents which were executed by the parties for securing payment of such rent. to the property being freed from encumbrances and the permission of the Perak Government being obtained. inter alia. the leasing agreements were.• In Tiong Goon Toon v Credit Leasing Corporation Sdn Bhd [1986]1CLJ604 the chargors argued that since the machinery. would continue to remain in force because the contracts or the leasing agreements in question. or the rent payable thereunder. Change in the law • In Tye Ong Kiat & Anor v Tan Guan Hoo [1951] MLJ 73 the defendant entered into an agreement during the Japanese occupation of Malaya in July 1945 to sell certain property to the plaintiffs subject. the fire. were not only wide enough to apply to the new situation. that is. thus. frustrated. but had so obviously stipulated for the destruction of the said machinery for any untoward incident such as fire. so nothing more could be said of them. rent continued to be payable in full after the fire. . Subsequently there was a change of law. This forced the tenants to leave their premises which they rented at a monthly rental. the Debtor and Creditor (Occupation Period) Ordinance 1948 which gave the mortgagee the right to reinstatement of his charge for the revalued amount of the mortgage debt. they would not have considered that such an order would render the performance of the contract impossible. • The High Court held that the contract had not been frustrated.• The plaintiffs paid the purchase price and defendant paid off the only charge on the property. • A situation similar to a change of law occurred in Mohamed v Ho Wai [1961] MLJ 7 when the Menteri Besar of the State of Selangor ordered that all occupants in the district of Sungai Way to vacate the said district. . The reinstatement of the charge was only to ensure repayment. The Debtor and Creditor (Occupation Period) Ordinance 1948 did not cast a burden on the land but on the defendant for payment of the amount of his revalued personal obligation. The law had not made the performance of the contract impossible and an order for specific performance was made. The High Court held that this event did not frustrate the tenancy contract. The defendant pleaded that the change of law had frustrated the agreement. since if either party wished he could have terminated the tenancy by one month's notice. as a grant of a lease for a term of years does not necessarily mean that the lessee intends to reside on the property and. if the parties had considered such a situation at the time when the contract was entered into. The manner in which the defendant freed the land from encumbrances was entirely a manner within his discretion and outside the terms of the contract. The merger meant that the first defendant had no legal standing or authority to operate its business at the said premises in view of the fact that it had surrendered its license to Bank Negara through no fault of its own. due to its merger exercise with the second defendant. The High Court agreed with the first defendant's submission. The first defendant subsequently informed the plaintiffs that it would vacate the premises. the plaintiffs entered into a tenancy agreement with the first defendant. It was agreed that the first defendant would pay damages to the plaintiffs in the event that the first defendant terminates the tenancy before the expiry thereof. The plaintiffs took action against the defendants for the losses suffered by it as a consequence of the premature termination of the agreement. Resulting from the premature termination. thereby terminating the tenancy. The first defendant contended that the tenancy was terminated on account of frustration that flowed from the directive by Bank Negara for it to merge withthe second defendant and the vesting order issued by the High Court granting approval for the transfer of all its business affairs to the second defendant. It was not self-induced frustration. the agreement had come to an end by way of frustration.• The decision in Mohamed v Ho Wai may be compared with Keshore a/l Anupchand Metha & Anor v Abrar Finance Berhad & Anor [2003] 1 AMR 141 which is similar but the High Court held that the tenancy agreement was frustrated. . In this case. Therefore. the plaintiffs re-tenanted the premises to a third party at a lower monthly rental. the agreement to sell the land had become invalid and void. In Yeo Siew Kiow iwn Nyo Chu Alang & Yang Lain [199715 MLJ 313 the High Court held that when the land became the subject of acquisition by the state authorities. following s 57(2) of the Contracts Act. . • Refer to the full case.Acquisition of land • An acquisition of land after a sale and purchase agreement had been executed and before the transfer is fully effected has been held to frustrate the sale and purchase agreement. When the land was compulsorily acquired and compensation awarded. . the subject matter of the agreement ceased to exist and performance of the agreement became impossible.. They subsequently applied for EMR titles in respect of the land. [1997]1 AMR 34. For that reason.• In Lee Seng Hock v Fatimah binti Zain [1996]3 MLJ 665. Siti Norma Yaakob JCA stated: We next ask ourselves whether the acquisition of the land had radically changed the obligation of the respondent to sell the '/2 share of the land to the appellant. we consider that the compulsory acquisition of the land had frustrated the agreement so as to discharge both the appellant and the respondent of their obligations under the agreement. CA the Court of Appeal held that the sale and purchase agreement in this case has been frustrated.. We answer this in the affirmative. Failure to obtain approval • In Murugesan v Krishnasamy & Anor 44 [1958] MLJ 92 the defendants were in occupation of land under Temporary Occupation Licence. In order to cut the timber. • In Yong Ung Kai v Enting [1965] 2 MLJ 98 the defendant entered into a written agreement with the plaintiff for the sale of timber on land in which the defendant's tribe had communal customary rights.• The defendants then entered into an agreement with the plaintiff which recited that the defendants had applied for state land and which provided that for the consideration stated the defendants agreed to execute valid transfers of the land to the plaintiff as soon as the titles were issued by the Collector of Land Revenue. • Thompson CJ held that a contract for the sale of land which was made subject to approval of the Collector of Land Revenue was frustrated by "supervening impossibility" under s 57 of the Contracts Act when the said approval was not granted. the contract became impossible to perform. . Subsequently. but this was refused. the defendants' application for EMR titles were refused. a licence or permit from the forests department was necessary. The defendant did his best to obtain the necessary licence. The plaintiff thereupon claimed the return of the money paid by him as the contract had become impossible of performance. The High Court held that when the application was refused. the first appellant. therefore. acting under the powers conferred upon it by Regulation 8(1) of the Essential (Protection of Deposits) Regulations 1986. it may be argued that the contracts were conditional contracts. Subsequent to these loan agreements. to the second to fifth appellants. Alternatively.• Sinnadurai submits that the views expressed in these two decisions may be questioned. following the Court of Appeal's decision in Dato Yap Peng & Ors v Public Bank Bhd & Ors [1997]3 MLJ 484. the majority shareholder of the second-to fifth appellants. the granting of the permission was a condition precedent for the contract to come into force. . that is. both the parties knew that permission were necessary for the execution of the contract. had guaranteed various loans given by the five respondents (they were all banks). To each of the banks. • However. issued the Essential (Protection of Deposits) (No 14) Order 1986. The parties should. have made provision in the contract for the allocation of the risk in the event that permission was not granted. Bank Negara. In Murugesan and Yang Ung Kai. The effect of the Order was to impose a prohibition upon the first appellant. one or more of the appellants had provided some form of security.CA a contract does not automatically become frustrated by the mere fact that an approval was not granted by the relevant authorities. In this case. there was a provision in the Order which provided that such prohibition would not apply in cases where prior approval of Bank Negara was obtained. the contract would only be frustrated if and when such application was made and it was rejected by Bank Negara. with their monies. in some cases with the prior approval of Bank Negara.• and all companies in which he had an interest from dealing. and as it was for the appellants to make such an application to Bank Negara. • The Court of Appeal held that the contract would only become frustrated if it could be proved that the party who is required to obtain the approval for the license had made an effort and taken all necessary steps but was unable to obtain the license. properties or assets. as there was a provision for the appellants to obtain the prior approval of Bank Negara. either by themselves or through their agents. On the facts. However. frustrated in the light of the Order made by Bank Negara. the five banks took steps. inter alia. to enforce their rights to recover monies due under the loans. Upon the breach of the loan agreements. . The appellants then issued a writ against the banks claiming that the sale of the properties which had been given by way of security to the banks was. then his obligation is to use his best endeavours to obtain the necessary licence. If this is uncertain. which can be overcome by obtaining a licence. The plaintiff paid an earnest deposit and part of the purchase price. will only frustrate a contract at once if the person affected by the prohibition can show that no licence could in any event have been obtained. However. due to the economic recession and Bank Negara Malaysia's circular restricting local financial institutions and banks from giving out loans. According to the plaintiff. the balance outstanding sum was to be paid by the plaintiff after it could obtain a loan. Failure to obtain loan • In Maxisegar Sdn Bhd v Silver Concept Sdn Bhd & Anor [2001] 6 MLJ 762 by an agreement in writing. the plaintiff failed to obtain the said loan. . leaving aside for the moment contracts affected by war. and the contract then only becomes frustrated if and when all such efforts have failed. the first defendant agreed to sell and the plaintiff agreed to purchase a piece of land in Ulu Selangor.• The Court agreed with the judgment of Kerr J in Dalmia Dairy Industries Ltd v National Bank of Pakistan [1978] 2 Lloyds Rep 233 as follows: • However. The plaintiff had arranged for its main financier to syndicate a loan to enable the plaintiff to pay the balance of the purchase price of the land to the first defendant. it is settled law in England (and on the evidence also in India) that a supervening prohibition of some contractually undertaken obligation. for a declaration that it was discharged from its obligations to perform the agreement and an order that the first defendant refund the total sum paid by the plaintiff to date. there was no provision in the agreement that the agreement was conditional on the plaintiff obtaining a loan in order to perform its obligations. . on the other hand. The first defendant. willing and able to perform its part of the agreement. The plaintiff sought. • The High Court referred to Universal Corporation v Five Ways Properties Ltd [1979] 1 All ER 522.• The plaintiff argued that these supervening events had caused its agreement with the first defendant to be frustrated. Further. that the doctrine of frustration cannot apply merely because a purchaser finds that he does not have the money to complete a contract. inter alia. The High Court held that when the plaintiff entered into the agreement. was ready. it took the risk of hoping to get a loan and would have to bear the consequence when it failed it to do so. The plaintiff's action was dismissed with costs. The sale and purchase agreement was not frustrated as the said land had not become radically different from that which was stated in the contract. the argument of frustration failed in Brisdale Rasa Development Sdn Bhd (dahulu dikenali sebagai Expedisi Ria Sdn Bhd) v Silver Concept Sdn Bhd & A nor [2001] 1 AMR 1087 which had similar facts. the plaintiff agreed to purchase a piece of land from the first defendant. . the land. The plaintiffs claimed against the • The Court also referred to the test of frustration in Davis Contractors Ltd which was followed by the Federal Court in Ramli bin Zakaria & Ors v Government of Malaysia for the requirement that the changed circumstances after a contract has been entered must render performance of the contract something radically from that originally undertaken. The defendant failed to deliver vacant possession of the units within the agreed time. In this case. the plaintiff was unable to secure the release of a loan and pay the third instalment to the first defendant.• Similarly. the High Court held that there is no supervening event which significantly changed the nature of the subject matter of the contract. Later. that is. On the issue of frustration. Economic crisis • In Tai Kim Yew & Ors v Sen tul Raya Sdn Bhd [2004] 3 CLJ 310 the plaintiffs entered into an agreement with the defendant to purchase condominium units to be built by the defendant. • The High Court held that the question of frustration did not arise in this case as there was no evidence that the condominium project was impossible to complete. In any event for the doctrine of frustration to apply. inter alia. . the condominiums were eventually completed. albeit after a long delay.• defendant for liquidated damages. there was no evidence to show that a fundamentally different situation had arisen that rendered it impossible for the defendant to complete the condominium project. it was insufficient for the defendant to merely refer to the economic crisis and the consequential dire financial situation of its parent company. On the contrary. The defendants alleged. The High Court referred to s 57(2) of the Contracts Act and Lord Denning's judgement in The "Eugenia" and held that in the present case. that the contract was frustrated due to its dire financial position brought about by the 1997-1998 national economic crisis which was beyond its control. . The circumstances were such that there had been a radical change of what had been undertaken by the parties. he informed the defendant of his whereabouts and status. the High Court declined to grant a declaration that the contract still subsisted. The unavailability of the plaintiff to work for at least two years would have made it necessary for the defendant to employ another handyman in his place. While under detention.Detention of employee • In Sathiaval a/l Maruthamuthu v Shell Malaysia Trading Sdn Bhd [1998]1 AMR 454 the plaintiff was detained under the Emergency (Public Order and Prevention of Crime) Ordinance 1969. Based on the principle that courts will not grant specific performance of a contract of service. The inability of the plaintiff to continue his employment with the defendant was not due to the fault of the defendant. in the absence of special circumstances. The plaintiff took an action seeking for a declaration that his dismissal was void and of no effect and for an order that he be reinstated to his post. The defendant terminated the plaintiff's contract of employment on the ground of frustration of the employment contract. The High Court held that the employment contract was frustrated by the plaintiff's detention. frustrated. thus. The hirer could not have and enjoy possession of the vehicle nor the right to purchase the vehicle when property is to pass and the vehicle is not free from encumbrance in favour of any third party at the time property is to pass. the High Court held that in this situation. there was a complete failure of consideration for the hire. the appellant. • In BBMB Kewangan Bhd v Tan Swee Heng & Anor [2002]7 CLJ 377. could no longer fulfil any of the conditions and warranties under s 7(1) of the Hire-Purchase Act 1967. . • The High Court referred to s 57(2) of the Contracts Act and held that the contract had become impossible to perform by reason of this supervening event and the contract was. as owner.purchase agreement. The High Court then referred to s 66 of the Contracts Act to allow the hirer a refund of the amount paid as instalments. Following the seizure of the vehicle.Seizure of goods by customs department • A seizure of goods under hire-purchase after the execution of the hire- purchase agreement was held to amount to a frustration. . that is. this case. • The Court of Appeal referred to s 57 of the Contracts Act and set out the following three elements of the doctrine of frustration as distilled from case law: i) 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.• However. that the seizure of the car by customs officers had frustrated the contract. under which repayment was guaranteed by the second defendant. The defendants contended. CA . the plaintiff let a BMW motor car to the first defendant pursuant to a hire-purchase agreement between them. a different decision was arrived at in Guan Aik Moh (KL) Sdn Bhd & Anor v Selangor Properties Bhd [2007] 4 MLJ 201. self-induced frustration is ineffective. The court must find it practically unjust to enforce the original promise. The car was later seized by officers of the Royal Customs for default in the payment of duty payable on the car. inter alia. iii) 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. ii) the event relied upon by the promisor must be one for which he or she is not responsible. The property was in fact subject to an existing tenancy. The defendant did not do so but merely relied on its agent to make payments. the Court of Appeal held that the seizure of the car did not amount to a frustrating event.• On the facts. Two of the above three elements were absent. Thus. First. In Shigenori Ono v Thong Foo Ching & Ors [1991] 3 CLJ 1852 the plaintiff agreed to buy property from the third defendant. Secondly. Therefore. The tenant (third party) took out an injunction against the third defendant. . Effect of injunction • A contract may be frustrated as a result of an injunctive order which renders the contract impossible of performance. which was also not done by the agent. this event could be seen as an instance of self-frustration as it was the first defendant's obligation to ensure that the duties were paid by its agent. the risk of that happening was allocated to the first defendant by the contract as it was the first defendant's obligation to ensure that all the duties due were paid by its agent. 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. the eventuality of lawful forfeiture had been provided for by the parties in clause 3(b) of the hire- purchase agreement. the doctrine of frustration embodied in s 57 of the Contracts Act did not apply. The High Court held that the redemption agreement suspending the right of the plaintiff to exercise its right of foreclosure. the plaintiff loaned $20 million to a third party. Subsequently. the plaintiff had the right to proceed with its application for an order for sale of the land. The plaintiff suspended the legal proceedings and the defendant paid $2 million. It was agreed that the defendant should pay $2 million to the plaintiff. and the defendant company charged certain lands to the plaintiff to secure repayment of the loan. had been frustrated by the injunction. the plaintiff entered into a redemption agreement with the defendant. The third party defaulted in making payment of the loan and interest and the plaintiff commenced legal proceedings and applied for an order for sale of the charged lands under the National Land Code 1965 to satisfy the debt due. .• In Standard Chartered Bank v Kuala Lumpur Landmark [1991]2MLJ251. Therefore. both the plaintiff and the defendant were served with an injunction order obtained by one Monsia Investment Pte Ltd restraining them from acting upon the redemption agreement. Subsequently. and deliver a bank guarantee providing for the payment of $18 million. The effect of the injunctive order rendered the redemption agreement to be nugatory. the said agreement has been rendered impossible to perform within the terms and conditions of the said agreement. . Lim Beng Choon J stated: …I am satisfied that because of the injunction obtained by Monsia Investments Pte Ltd restraining both the plaintiff and the defendant from acting on the redemption agreement. if and only if. The very essence of the redemption agreement has been frustrated as the performance of the same would be a radical change of its original terms and conditions. and under the circumstances the right of the plaintiff to proceed with the foreclosure proceeding is no longer subject to the redemption agreement .• After referring to some case law. the defendant was able to comply with the redemption agreement within the time stipulated in the said agreement. in that the redemption agreement was intended to suspend the right of the plaintiff to institute foreclosure proceedings against the charged lands. it was clear that the defendant bank would not suffer any detriment or loss of benefit or any prejudice by performing the redemption agreement. • Anuar J. Consequently. in Kuala Lumpur Landmark v Standard Chartered Bank [1994]2MLJ 559. Thus. The titles could only revert to the plaintiff upon payment in accordance with the redemption agreement. the injunction on the Monsia suit did not frustrate the agreement . it could hold the charges as security for the performance of the plaintiff's obligation to pay RM18 million and interest. The lands remained encumbered against the plaintiff and the bank was only obliged to discharge the charges after it had received the RM18 million together with all interest due. Although the defendant could not foreclose on the charges.• However. on the same facts. held that the redemption agreement was not frustrated by the injunction. • Refer to the full case. it brings the contract to an end forthwith. Thus. since such contracts are not void ab initio. the courts held that each party must fulfil his contractual obligations so far as they have fallen due before the frustrating event. This rule had brought much harshness as can be seen in the early case of Chandler v Webster [1904] 1 KB 493. without more and automatically. both parties are discharged from all future obligations after the frustrating event. AND RELIEF FOR FRUSTRATED CONTRACTS • Under the common law. in that it began as a valid contract which now comes to an end automatically. . when frustration occurs. EFFECT OF. However. but he is excused from performing those that fall due later. the decision could not cover cases of partial failure of consideration and other consequences arising out of a frustrated contract. Thus. in 1943.• The applicable rule then was that the loss must lie where it had fallen. . Although this reduced the harshness of the common law rule. the Law Reform (Frustrated Contracts) Act was introduced in the United Kingdom. The harshness of this rule that the contract remained in full force until the date of frustration was partly ameliorated by House of Lords decision in Fibrosa Spolka Akcvjna v Fairban Lawson Combe Barbour Ltd [1943] AC 32 that an action for money had and received was quasi contractual in nature and recovery can be allowed where there is a total failure of consideration. with reasonable diligence. to be impossible or unlawful. • Section 57(3) of the Contracts Act provides as follows: Where one person has promised to do something which he knew. might have known. • The provision in s 57(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. . • Besides s 66 of the Contracts Act. and which the promisee did not know. or.• In Malaysia. relief for frustrated contracts is provided in s 66 of the Contracts Act which provides for restoration of advantage received for agreement discovered to be void and contract becomes void. the promisor must make compensation to the promisee for any loss which the promisee sustains through the non- performance of the promise. these sections have been seldom used and most cases of frustration allowed relief under s 66 of the Contracts Act. Although the provisions in ss 15 and 16 are more comprehensive and give better relief to the parties. ss 15 and 16 of the Civil Law Act 1956 (Revised 1972) Act 67 which adopted the provisions of the United Kingdom's Law Reform (Frustrated Contracts) Act 1943 also apply. or to make compensation for it. • In this Illustration. being already married to C. to the person from whom he received it. A being already married to C. A must make compensation to B for the loss caused to her by the non-performance of his promise". A must compensate B as he has made a promise to marry B which he knows is an impossible or unlawful act.• This section is explained in Illustration (c): "A contracts to marry B. and (ii) ss 15 and 16 of the Civil Law Act. or when a contract becomes void. Section 66 of Contracts Act: "contract becomes void“ • Section 66 of the Contracts Act provides as follows: When an agreement is discovered to be void. and being forbidden by the law to which he is subject to practise polygamy. any person who has received any advantage under the agreement or contract is bound to restore it. . • The next part will examine: (i) s 66 of the Contracts Act. when the contract becomes void. any person who has received any advantage under a contract that becomes void is bound to restore it. to the person from whom it was received. the contract is forthwith and automatically terminated and both parties are discharged as to all future obligations. or to make compensation for it. "a contract which ceases to be enforceable by law becomes void when it ceases to be enforceable". • The Privy Council in Govindram Seksaria & Anor v Edward Radbone (1947) LR 74 IA 295. the only relief is thus restitutionary which is provided in s 66 of the Contracts Act.• "Contract becomes void" refers to contracts that become impossible or unlawful under s 57(2) of the Contracts Act. • Under s 66. PC (Appeal from India) has explained the phrase concerning "compensation“. • Refer to the full case. Section 57(2) of the Contracts Act being the Malaysian equivalent of the common law doctrine of frustration. • Without any enforceable contract. • Under s 2(j). . 000 in accordance with s 66 of the Contracts Act.• Section 66 of the Contracts Act has been applied in various cases on frustration. benefit and interest in the said vehicle as they now have a defective tile. During the course of the hiring. • As the vehicle was seized and forfeited. Therefore. The High Court held that when the agreement was entered into. the appellant must return the money they have received from the respondent who had paid towards the purchase of the car amounting to RM57. the appellant had represented that they were the owners of the said vehicle and capable of giving good title to the respondent whenever the latter decided to pay the net balance due which would result in the hiring coming to an end. It would be impossible for the appellant to assign and make over all its right. • In Public Finance Bhd v Ehwan bin Saring [1996} 1 MLJ 331. the agreement has become void pursuant to s 57(2) of the Contracts Act. the respondent (hirer) and the appellant (owner) entered into a hire-purchase agreement with regard to a motor car. the vehicle was seized by the Customs and Excise Department for an alleged offence of the Customs Act 1967 ( Act 235) and was subsequently forfeited. . • Siti Norma Yaakob JCA observed: since we have already ruled that such an agreement is now void under section 57(2) of the Act [the Contracts Act]. . he is entitled to be refunded the 10% deposit he had paid to the respondent under section 66 of the Act [the Contracts Act] . At most. The remaining issue was the appellant's claim for the compensation awarded under the Land Acquisition Act 1960 ( Act 486). 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. the respondent cannot claim any right to such compensation.• In Lee Seng Hock v Fatimah We Zain [199613 MLJ 665.. CA the agreement for the sale and purchase of land was held to be frustrated under s 57(2) of the Contracts Act when the land was acquired by the government.. . in the case of sums so payable. subject to section 16. have effect in relation thereto. cease to be so payable. The relevant provisions of s 15 provides as follows: (1) Where a contract has become impossible of performance or been otherwise frustrated. Sections 15 and 16 Civil Law Act • Part VI of the Civil Law Act 1956 which provides for ss 15 and 16 is titled "Frustrated Contracts". As stated earlier. these provisions were adopted from ss 1 and 2 of the United Kingdom's Law Reform (Frustrated Contracts) Act 1943. be recoverable from him as money received by him for the use of the party by whom the sums were paid. subsection (2) to (6) shall. and the parties thereto have for that reason been discharged from the further performance of the contract. in the case of sums so paid. and. (2) All sums paid or payable to any party in pursuance of the contract before the time when the parties were so discharged (in this Act referred to as "the time of discharge") shall. obtained a valuable benefit (other than a payment of money to which subsection (2) applies) before the time of discharge. or for the purpose of. there shall be recoverable from him by the said other party such sum (if any). by reason of anything done by any other party thereto in. . the performance of the contract. not exceeding the value of the said benefit to the party obtaining it. as the Court considers just. and. having regard to all the circumstances of the case and. in relation to the said benefit. 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 subsection (2). of the circumstances giving rise to the frustration of the contract.• (3) Where any party to the contract has. or for the purpose of. (b) the effect. in particular - (a) the amount of any expenses incurred before the time of discharge by the party benefited in. they no longer need to be paid. • Section 15(1) provides that when a contract becomes impossible of performance or has been otherwise frustrated. • Section 15(2) provides that "in the case of sums so paid". For sums which are payable. they are recoverable as money received for the use of the party by whom the sums were paid. This provision alleviates the harshness of the common law rule as illustrated in Chandler v Webster where Y was unable to recover the sum of £100 paid but was also liable to pay the balance £41 15s which remained due and payable. This means that money which had been paid to any party before the happening of the event of frustration is recoverable.• Unlike the Contracts Act which makes no reference to "frustration". the parties are discharged from further performance of the contract. s 15(1) of the Civil Law Act uses both terms. while "sums payable" cease to be payable. • Subsections 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. "contract impossible of performance" and "frustrated contract". . • Section 15(2) applies to money paid or payable. 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. s 15(3) provides for the recovery of such valuable benefit. FC. This is provided in the proviso to s 16(2) and in s 16(3)(a). • Section 15(2) of the Civil Law Act was applied in by the Federal Court in National Land Finance Co-operative Society Ltd v Sharidal Sdn Bhd [1983] 2 MLJ 211. Where parties have conferred benefits other than money before the time of discharge. • It should be noted that for relief whether for sums paid or payable. However. not exceeding the value of the said benefit. 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. the recovery is not as of right but is subject to the Court's discretion as the Court considers just. having regard to all the circumstances of the case. . the basic infrastructure was not sufficient and a sub-station had to be constructed. the plaintiffs were entitled to a refund of sums paid under the agreement following s 15 of the Civil Law Act. The Court held that the requirement of a sub-station 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. the High Court held that the plaintiffs' tenancy agreement with the defendant was frustrated when the plaintiffs had difficulty in obtaining electricity. Therefore. that is. In this case. a charter party. • Section 16 of the Civil Law Act provides that ss 15 and 16 of the Civil Law Act applies to contracts whether made before or after the coming into force of this Act.• Another case where relief was granted under s 15 of the Civil Law Act is United Asian Bank v Chun Chai Chai [1988] 2 CLJ 253 . . contract of insurance and certain contracts for the sale of goods. According to Lembaga Lektrik Negara. It also applies to contracts to which the Government is a party but certain contracts are excluded in s 16(5).