Contract Law: Discharge by Frustration & Breach

INTRODUCTION DEFINITION • Discharge means to liberate or free, to terminate or extinguish. A discharge is the act or instrument by which a contract or agreement is ended. • Discharge of contract means a contract is discharged when rights and obligations created by it comes to an end. CATEGORIES 1. Discharge by Performance - Both the parties has performed their obligations then contract comes to an end. 2. Discharge by breach of contract – divided into two: a) Actual breach – breach after due date of performance b) Anticipatory – breach before due date of performance. 3. Discharge by Agreement - when both parties agree to bring the contract to an end and release each other from their contractual obligations. 4. Discharge by Frustration - where there exists a change in circumstances after the contract was made, which is not the fault of either of the parties that renders the contract either impossible to perform or deprives the contract. DISCHARGE BY FRUSTRATION SECTION 57 (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.” A contract to do an act, after the contract is made: • Becomes impossible • Some event which promisor cannot prevent • Unlawful • Becomes void when the act becomes impossible or unlawful Guan Aik Moh (KL) Sdn Bhd & Anor v Selangor Properties Bhd [2007] 4 MLJ 201 Gopal Sri Tam JCA sets out the three elements that must be fulfilled before the doctrine of frustration can be applied: a) No provision has been made in the contract; b) Event relied upon by the promisor must be one which he is not responsible; c) It would be unjust to enforce the original promise. INSTANCES OF FRUSTRATION EFFECT OF WAR AND FIRE • In illustration (d) in Section 57 of Contract Act 1950: “A contracts to take in cargo for B at a foreign port. A’s Government afterwards declares war against the country in which the port is situated. The contract becomes void when war is declared.” Berney v Tronoh Mines Ltd [1949] MLJ 4 Facts: The plaintiff worked at the defendants’ tin mine art Tanjong Tuallang, Perak. When the Japanese invaded Malaya, the defendants’ European staff members evacuated from Malaya. The plaintiff, a Swiss national, elected to remain and claimed damages from the defendants. The defendants contended that consequent of the Japanese occupation of Perak, the contract of employment between them was discharged by frustration. Held: The invasion of Malaya by Japanese forces frustrated the contract. Thus, there was no breach of the contract by the defendants. DESTRUCTION OR UNAVAILABILITY OF SUBJECT MATTER • If something vital to performance of a contract is physically destroyed or becomes unavailable, the contract may be frustrated. E.g: where there is a contract to buy a painting, but before it can be handed over, it is stolen or destroyed by fire. Taylor v Caldwell (1863) 3B & S 826; 122 ER 309 Facts: The defendant agreed to let to the plaintiff to use of musical hall and garden for the purpose of the entertainment. However, before the day of the performance arrived, a fire had occurred and destroyed the music hall. The defendant, through no fault of his own, was unable to perform the contract by letting the plaintiff. Held: HC held that the contract was frustrated. The 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. The music hall having ceased to exist without the fault of either party, both parties are excused; the plaintiff from taking the gardens and paying the money, and the defendant from performing their promise to give the use of the hall and gardens and other things. THE NON-OCCURRENCE OF A SPECIFIED EVENT • The occurrence of a specified event is the core of a contract and the non-occurrence of a specified event may frustrate the contract. Krell v Henry [1903] 2 KB 740 Facts: H agreed to hired a flat from K during the daytime of 26 and 27 Jun 1902, the contract itself contained no express reference to the coronation processions, but K had advertised that the windows of the flat were to be let to view the processions which would pass the flat on those days, and H had entered into the contract after reading the advertisement. However, the processions were later cancelled. Two-thirds of the rent had not been paid when the processions were abandoned. Held: The Court of Appeal held that K could not recover it. The Court considered that the processions and the relative position of the flat at the foundation of the agreement. The contract was therefore discharged. Cheng Seng Hup & Ors v Wangsa Tegap Sdn Bhd [2012] 8 MLJ 425 Facts: The plaintiffs, who were husband and wife entered into SPA agreement with the defendant developer to purchase a service suite. Upon the execution of the SPA, the plaintiffs paid a deposit. The defendant contended only 49 units of the service suites were sold 2 1/2 years after the launch of the project, making it commercially impossible for the defendant to proceed with the venture. The defendant cancelled the project and negotiated with the 49 purchasers to rescind the respective SPAs. The plaintiffs asked for RM150,000 in compensation. The defendant rejected the proposal and refunded the deposit to the plaintiffs via cashier's order which the latter accepted and presented for payment without reservations. Thereafter, the plaintiffs' solicitor informed the defendant they were holding the refunded deposit as stakeholders and that the plaintiffs were terminating the SPA and wanted RM463,000 in damages. Held: The High Court held that the defendant had established that the SPA was rescinded due to poor sales, which was an unforeseen and supervening event not provided in the contract. Despite aggressive marketing locally and internationally, they were poor sales. This was beyond the defendant’s control. The SPA had become commercially impossible to perform due to the change in circumstances. DEATH OR INCAPACITY FOR PERSONAL SERVICE • A party to a contract is excused from performance if it depends upon the existence of a given person, if that person dies or becomes incapable to perform. • In illustration (e) in Section 57 of Contract Act 1950: A contracts to act at a theater for six months in consideration of a sum paid in advance by B. On several occasions A is too ill to act. The contract on those occasions become void. Robinson v Davison (1871) LR 6 Ex 269 Facts: D contracted with R to the effect that D would procure a concert to be performed by his wife. D said if R paid D, his wife would perform. His wife became seriously ill on the specified date. Had she gone on with the recital, her life would've been in serious danger. R suffers losses and sues D. Held: The Court held that D was not liable as it was frustrated by his wife's illness, because both parties must have assumed that the performance would only take place if his wife was fit to perform. As reasonable men must have intended, the contract was terminated. Nga Sheau Sheau v United Merchant Finance Bhd [2004] 3 CLJ 243 Facts: the plaintiff sued as the widow of Chong Sau Nan, the deceased, who during his lifetime as a purchaser executed a SPA with the developer Ornaresort Bhd as the vendor. The deceased as borrower and the defendant as lender had entered into the loan agreement whereby the borrower agreed to take a loan from the defendant. Subject to a special express condition in the loan agreement requiring the borrower to take up a mortgage reducing term assurance for a sum insured equivalent to the value of the loan. The borrower, however, passed away without taking up the mortgage assurance. Held: The High Court held that the death of the deceased has resulted in the non-fulfilment by and the impossibility of the deceased taking up the mortgage assurance under the special express condition. Such impossibility rendered the load agreement void under section 57(2). INSTANCES FOR NO FRUSTRATION EVENT CAUSING OF GOODS BY SEA MORE EXPENSIVE. • An event that caused the carriage of the goods by the sea to be more expensive does not render the contract impossible of performance. This kind of contact is not regards ad frustrated. TSAKIROGLOU & CO V NOBLEE THORL [1962] AC 93 • A quantity of Sudanese groundnuts was sold by contract at a price of £50 per ton c.i.f. Hamburg, and the vendor undertook to ship the goods in Port Sudan. After the conclusion of the contract, the Suez Canal was blocked owing to a war. Although the vendor could still have had the goods delivered to Hamburg via the Cape of Good Hope, the freight would have amounted to £ 15 per ton as opposed to £7 by way of the Suez Canal. Accordingly the vendor refused to load the goods and declared the contract at an end. • The House of Lords upheld the arbitrator's award holding the vendor in breach. For this was a contract of sale in which it was indifferent to the purchaser by what route the vendor delivered the goods to Hamburg. The doubling of the freight was therefore regarded as unimportant. Such journey would not be commercially of fundamentally different but merely more expensive. SENTUL RAYA SDN BHD V HARIRAM A/L JAYARAM AND OTHERS [2008] MLJU 3087 ◦The 1997 financial crisis merely made it more onerous or perhaps more expensive for the appellant to perform its obligations. It did not render the contract radically different. There is a further reason why the plea of frustration should fail. Under Regulation 11(3) of the Regulations it was open for the appellant to make representations to the Controller of Housing – to quote from the Regulation – "owing to special circumstances or hardship or necessity compliance with any of the provisions in the contract of sale is impracticable or unnecessary". ◦It was held that regulation 11(3) clearly excludes the operation of the doctrine of frustration in respect of contracts regulated by the Act. FINANCIAL HARDSHIP OR CRISIS ◦The doctrine of frustration cannot be invoked merely because a party finds, for whatever reasons; he has not got the money to complete the contract. A person who enters into an agreement to purchases a piece of land takes the risk of getting a loan. When he failed to get the said loan, he has to bear the consequences of the risk. TAI KIM YEW & ORS v. SENTUL RAYA SDN BHD [2004] 3 CLJ 310 • The plaintiffs were purchasers of condominium units. They claimed against the defendant developer, inter alia, for liquidated damages ('LAD') for delay in the delivery of vacant possession, and the right to set off the LAD against the balance of the purchase price for their respective units. The defendant claimed that the plaintiffs were not entitled to the LAD as they had not given notice of their intention to claim LAD as required by s. 56(3) of the Contracts Act 1950. • It was held that the doctrine of frustration was not applicable. There was no evidence that it had become impossible to complete the condominium project. It was eventually completed after a very long delay. It was not sufficient for the defendant to merely refer to the national economic crises of 1997-1998 and the consequential dire financial position of its parent company to invoke the said doctrine. SHORTAGE OF LABOUR AND MATERIALS IN BUILDING CONTRACTS. • Where the shortage of labour and materials in building project caused the construction cost to increase and be more expensive, the contract is not frustrated. Devis Contractors Ltd. V Fareham Urban District Council [1956] AC 696 • The appellant agreed to build 78 houses within eight month for the respondent for a fixed sum of $94,000. Owing to unexpected shortage of skilled lanour and certain materials, the contract took 22 month instead of eight month to complete and cost $115,000. The appellant contended that there was frustration of the contract and claimed quantum merit for the actual cost incurred. • The court held that there was no frustration as the fact that the contract became more onerous or expensive to the appellant did not discharge the agreement. The thing undertaken was not, when performed, different from that contracted for. Kerajaan Malaysia V. Ven-Coal Resources Sdn Bhd [2014] 5 CLJ 186 • The plaintiff awarded to the defendant a contract to construct and complete two additional blocks of building for a school called Sekolah Kebangsaan Sungai Baharu, Kuala Kerian, Daerah Kuala Kerian, Perak ("the project").The contract sum was for RM3,511,597. Under the contract the completion date was 26 October 2009 and site possession was given to the defendant on 10 June 2008. There was later a three-month extension given to the defendant, even without the defendant requesting for it, in view of the steep increase in price of the building materials and the shortage building materials. It was an extension given as matter of course and across the board to all Bumiputra contractors during that time to alleviate their problems in the light of shortage and rise in the costs of building materials generally. That extended the completion date to 25 January 2010. • Held: the respondents had not repudiated the agreement by delaying the completion of the appellants' apartments by 12 months. It is worth remembering that in Universal Cargo Carriers Corp v. Citati [1957] 2 QB 401, 435, Devlin J reiterated that while the application of the doctrine of frustration is a matter of law, the assessment of a period of delay sufficient to constitute frustration is a question of fact. OCCURRENCE OF BAD WEATHER • A storm that effected the performance of the contract does not render the contract frustrated. • In Kwan Sun Ming V Chak Chee Hing, [1965] 1 MLJ 236: • The former FC held in a towage contract, a storm must be expected and would have to be guarded against, especially in the open sea. A party would therefore be bound as part of his contract to take all precautions necessary against storms that might reasonably be foreseen. • Wylie CJ(Borneo) stated that 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. The court referred to a concise definition of what constitute an “act of God”: An act of God, in the legal sense of the term may be defined as an extraordinary or circumstances which could not have been foreseen and which could not have been guarded against, or ,more accurately, as an accident due to natural causes, directly and exclusively without human intervention, and care reasonably to be expected of the person sought to be made liable for it, or who seeks to excuse himself on the ground of it. • The former Federal Court concluded that a feature of booth definitions is that the event must be one which not have been foreseen and which could not have been guarded against. KHOO THAN SUI V. CHAN CHIAU HEE [1976] 1 MLJ 25 • The defendant agreed to tow the plaintiff’s logs from Sungai Sugut to his log pond at Sandakan. The defendant towed a total of 82 logs but delivered only 11 logs to the plaintiff. In defence to the plaintiff’s claim, the defendant alleged that the logs were lost in a storm at sea. • The High Court held that in a towing contract of this nature a storm must be expected and would have to be guarded against especially in the open sea and therefore the defense of frustration failed. REMEDIES FOR DISCHARGE BY FRUSTRATION Section 57(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.” • A contract discharged by frustration becomes void. The frustrating event brings the contract to an end forthwith, without more, an automatically. The contract is terminated as to the future only. It is not void from the very beginning. It starts life as a valid contract but becomes to an abrupt and automatic end. Section 57(3) “Where one person has promised to do something which he knew, or with reasonable diligence, might have known , and which the promise did not know, to be impossible or unlawful, the promisor must take compensation to the promise for any loss which the promise sustains through the non-performance of the promise.” Section 66 “When an agreement is discovered to be void, or when a contract becomes void, any person who has received any advantage under the agreement or contract is bound to restore it, or to make compensation for it, to the person from whom he received it.” • When a contract becomes void under s.57(2) of the Act, s.66 CA provides the remedy of restitution for parties of a void contract • Under section 66, any person who has received any advantage under a contract that becomes void is bound to restore it , or to make compensation for it, to the person from whom it was received. • Section 66 of the contracts Act has been applied in various cases on frustration. Public Finance BHd v Ehwan bin Saring [1996] 1 MLJ 331 • The respondent (hirer) and the appellant (owner) entered into a hire purchased agreement with regard to a motor car. During the course of the hiring, the vehicle was seized by the Customs and Exise Department for an alleged offence of the Customs Act 1967 and was subsequently forfeited. • The high court held that as the vehicle was seized and forfeited, the agreement has become void pursuant to s57(2) of the contract act. It would be impossible for the appellant to assign and make over all its right, benefit and interest in the said vehicle as they now have a defective tile. DISCHARGE BY BREACH • Discharge by breach means when a party fails to perform his contractual obligation. The innocent party can claim for damages which makes him discharged from all future obligations. • Section 40 of the Contract Acts 1950 states that: When a party to a contract has refused to perform, or disabled himself from performing, his promise in its entirety, the promise may put an end to the contract, unless he has signified, by words or conduct, his acquiescence in its continuance. • A breach which is serious enough to give the innocent party this option of treating the contract as discharged can occur in one of the two ways: a) when a party has refused to perform; b) when a party disabled himself from performing in entirety (disability to perform). REFUSAL TO PERFORM • Refusal to perform simply indicates when a party refuses to perform his promise under the contract. • One must look at the actual circumstances of the case in order to see whether that one party to the contract is relieved from its future performance by the conduct of the other. • What must be examined is whether that conduct amounts to an absolute refusal to perform the contract, such as would amount to repudiation. Choo Yin Loo v. Visuvalingam (1930) 7 FMSLR 135 • The plaintiff contracted to perform certain work on the defendant’s land. It was agreed that the work should be done expeditiously by having 30 workers on the land at all times. If on any day there should be less than 30 workers, the plaintiff should be paid $1 per day for every worker short of the stipulated numbers. The defendant later ceased further payment on the allegation that there was shortage of the stipulated number of workers which entitled him to damages amounted to $3,845. • The plaintiff who have employed only a total of 3,355 workers when he ought to have 7,200, stopped work on account of the non-payment. He proceeded to sue the defendant for damages, claiming that he had been prevented by the defendant’s default from completing the contract. The defendant counter claimed for damages. • It was held that since the plaintiff had agreed to carry out the work expeditiously, his action in employing less than half the number of workers constituted a breach which entitles the defendant to put an end to the contract. Sime Hok Sdn Bhd V. Soh Poh Sheng [2013] 2 CLJ 615 • The A and the R entered into an oral agreement whereby the respondent, inter alia, would obtain the removal of caveats lodged over certain lots of land. On 12 April 1993, the respondent managed to persuade the proprietors of two lots of land to remove their caveats. However, he failed to reach an agreement with the proprietors of the third lot of land who rejected all offers of settlement and refused to remove their caveats. • On 1 May 1997, the appellant gave the respondent ten days' written notice to cause the removal of the caveats. By a second letter dated 28 May 2002, the appellant gave the respondent a month to cause the removal of those caveats. The appellant later sued the respondent in the High Court, claiming a sum of RM900,000 and damages together with interest and costs. ◦The High Court held that since the respondent had failed to remove all the caveats by the end of 1994, the appellant's cause of action would have accrued on 31 December 1994, notwithstanding the absence then, of written notice to the respondent to cause the removal of the caveats. ◦The filing of the plaintiff's suit on 20 September 2002 was thus outside the six year limitation period which expired on 31 December 2000. The High Court held that the plaintiff's claim was thus time barred. Notice is not necessary if a party delays performance for so long and in such circumstances, as to amount to a repudiation of the contract. ANTICIPATORY BREACH • A party expresses its intention not to perform its contractual obligation before its performance is due, or acts in such a way as to show its intention to break the contract before performance is due. • In such circumstances, the innocent party has 2 options: 1) He may accept the breach and immediately sue for damages; 2) He may ignore the breach and wait for the time when the performance is due. • In that case, the contract continues to bind both parties and the defendant will commit a breach only if the defendant fails to perform the contractual obligation on the due date. • If the guilty party does not perform the contract by then, the innocent party may sue for an appropriate remedy, damages or specific performance. Hochster v De La Tour [1853] 2 E&B 678 ◦In April 1852, the defendant entered into a contract to pay the plaintiff a courier, to accompany him on a trip. The trip was to begin on June 1, 1852. However, on May 11, 1852, defendant wrote to plaintiff and informed him that he changed his mind and would no longer need plaintiff’s services. Plaintiff brought suit against the defendant on May 22, 1852 to recover damages in anticipation of the future breach on June 1. ◦The court held that you can sue after repudiation but before the date of performance. You don’t have to sue immediately when the other party repudiates; you can wait until the performance date if you want. E5 Group Inc. v. Franssen, 2008 ABPC 336 • The Defendant company was contracted to create a new website for the Plaintiff company which would have a more user-friendly content management system than its existing one. The President and CEO of the Plaintiff company was looking for a website which he and his staff could change from time to time without having to retain a computer information technologist to change it for them. The Plaintiff company was also looking for a new “look and feel” for the website that is a new appearance and functionality for the website. • The Plaintiff’s claim against the Defendant company is that it failed to provide a fully-functional website which performed properly. The damages it claims ($24,553.60) were the incremental costs it incurred to have another website development the company provide ($16,073.60) with a fully-functioning website of the type the Defendant company contracted to provide, together with what the Plaintiff had already paid the Defendant company ($8,480.00) on the basis that it received no value from the Defendant’s services. • The judge held that it was the Plaintiff company, not the Defendant company, which breached this contract. The Plaintiff was not entitled to terminate the contract for anticipatory breach. When its President and CEO did so and denied the Defendant’s web developer access to the Plaintiff’s web server, he caused his company to breach the contract it had with the Defendant. REMEDIES OF BREACH OF CONTRACT When a contract is broken by a party, there are several courses of action (remedies) which the other party may pursue. These remedies include: Rescission of the contract Suit for damage Suit for specific performance Suit for injunction Suit upon quantum meruit RESCISSION OF THE CONTRACT • When a party to a contract has refused to perform, or disabled himself from performing his promise in its entirety, the promisee may put an end to the contract. This is called right of rescission. • It means setting aside of the contract. In such a case aggrieved party is discharged from all the obligations under the contract. SUIT FOR DAMAGES • The aggrieved party besides rescinding the contract can claim for damages. • Damages are monetary compensation allowed for loss suffered by the aggrieved party due to the breach of contract. • The object of the court in awarding damages for breach is that the aggrieved party may be put in the financial position which would have existed had there been no breach of contract. HADLEY v. BAXENDALE [1854] EWHC J70 Facts: H's mill was stopped due to the breakdown of a shaft. He delivered the shaft to B, a common carrier, to be taken to a manufacturer to copy it and make a new one. H had not made it known to B that delay would result in a loss of profits. By some neglect on the part of B, the delivery of the shaft was delayed in transit beyond a reasonable time. Held: B was not liable for loss of profits during the period of delay as the circumstances communicated to B did not show that a delay in the delivery of shaft would entail loss of profits to the mill. Thus where two parties have made a contract which one of them has broken, the damages which the other party ought to receive should be such as may fairly and reasonably be considered either arising naturally. SUIT FOR SPECIFIC PERFORMANCE • In certain cases of breach of contract, damages may not be considered as an adequate remedy. The aggrieved party may not be interested in monetary compensation. The court may, in such cases, direct the defaulting party to carry out the promise according to the terms of the contract. This is called 'Specific Performance’ of the contract. • Specific performance of a contract may, at the discretion of the Court, be enforced where the contract involves the sale of a particular house or some rare article or any other thing for which monetary compensation is not enough because the injured party will not be able to get an exact substitute in the market. • For example, A agreed to sell an old painting to B for Rs. 10,000. Subsequently, A refused to sell the painting. Here, B may file a suit against A for the specific performance of the contract. • Specific performance is not granted under the following situations : i. When monetary compensation is an adequate relief; ii. When the contract is of a personal nature, e.g., a contract to many, a contract to paint a picture, etc. In such contracts injunction is granted in place of specific performance; iii. Where it is not possible for the court to supervise the performance of the contract, e.g., a building construction contract; iv. When the contract is made by a company beyond its powers as laid down in its memorandum of association; v. When the contract is inequitable to either party; vi. Where one of the parties is a minor. SUIT FOR INJUNCTION • Where a party is in breach of a negative term of a contract (i.e., where he does something which he promised not to do) the court may by issuing an order, prohibit him from doing so. Such an order issued by court is called an 'injunction'. • Examples: G agreed to buy the whole of the electric energy required for his house from a certain company. He was, therefore, restrained by an injunction from buying electricity from any other person. Lumely v. Wagner [1852] EWHC (Ch) J96 Facts: P contracted with D to have her sing in his theatre for 3 months. D subsequently agreed to sing in another theatre. P sued D in a court of equity seeking an injunction to keep D from singing in other theatres. Held: These types of injunctions should be granted in situations where the remedy at law in inadequate; forcing her to pay for breach would not adequately compensate the P for losing this major talent and having her defect to a different theatre (and it would probably be pretty hard to estimate the damages). SUIT UPON QUANTUM MERUIT • 'Quantum Meruit' means 'as much as is merited (earned). • The normal rule of law is that unless the party has performed the promise in its entirety, he cannot claim performance from the other. To this rule, however, there are certain exceptions on the basis of quantum meruit. • When a person has done some work under a contract and the other party repudiates the contract, or some event happens which makes the further performance of the contract impossible, then the party who has already performed the work can claim payment for the work he has already done. • This right of claiming the payment for work already done, before the repudiation of the contract or its further performance becoming impossible is called the right to quantum meruit. • For example, X, a writer, was engaged by M who is the editor of a magazine to write a series of twelve articles to be published in the magazine. After X had delivered six articles, the publication of the magazine was discontinued. X is entitled to receive payment for the six articles already written