Unforeseen Events May Occur Which Create Obstacles

The nature of the law of contracts is that of, in any agreements made by the parties, unforeseen events may occur which creates an obstacle to achieve the purpose of the agreement made by the parties. A prevalent situation in the law of contracts is when the contract between two parties is formed and an unforeseeable event occurs which is beyond the control of the parties where it is now impossible to continue the contract. This is also known as impossibility of performances which prevents the purpose of the contract to be fulfilled. Nevertheless, when an impossibility to perform occurs in any agreement, it is norm that the agreements to be deemed as discharged under the doctrine of frustration.

Definitions, Distinctions and The Application

This differs from contracts that are void ab initio in which the parties are not liable for any discharge and termination because the contract is invalid since the beginning.

It is necessary to distinguish void ab initio from frustration.

So what is void ab initio?

Void ab initio literally means ‘void from the beginning’. In terms of contract law, contracts which are void ab initio mean that it is void from the very beginning where the agreement was made. It was never a contract, therefore it can’t create any legal relation, and therefore parties of the contracts could not rely on what was agreed in said agreement [1] . In an event of frustration, the contract is void. However, it is subjected to certain exceptions which will be explained later. [2]

Void ab initio contracts can never be void. In other words, agreement which is void ab initio is actually not a contract at all to begin with, for it is only an agreement, keep in mind that not all agreements are contracts but all contracts are an agreement. [3]

A contract may be discharged by frustration, performance, breach or an agreement.

A contract is discharged by frustration only under a special case when an impossibility of performances occurs after the contract was made. A contract is frustrated when subsequent to its formation, a change of circumstances renders the contract legally or physically impossible of performance [4] .At the beginning, the Common Law system adopted a very rigid approach where the parties are bound to perform their obligation even though it is impossible. The case of Paradine and Jane [5] is an example where the strict literal concept of frustration was insisted upon. In this case a tenant of a farm was dispossessed for two years following an invasion by Prince Rupert of Germany. The tenant claimed that he was not liable to pay rent for the two-year period. The court held in favour of the landlord: “Now the rent is a duty created by the parties upon the reservation, and had there been a covenant to pay it, there had been no question but the lessee must have made it good, notwithstanding the interruption by enemies, for the law would not protect him beyond his own agreement . . .” The justi”cation for refusing to discharge the parties from their obligations was that the parties could, if they wished, have included a specific term in the contract known as the force majeure or hardship clauses to deal with the eventuality.

Nevertheless, the evolution of the doctrine of frustration can be seen in the case of Taylor v Caldwell [6] where Lord Blackburn J adopted a more liberal approach towards the law .In this case the plaintiffs entered into a contract by which the defendants agreed to let the plaintiffs have the use of the Surrey Gardens and music hall. After the making of the agreement, but before the “rst day on which a concert was to be given, the music hall was destroyed by fire. The plaintiffs brought a claim against the defendant for breach of contract in failing to supply the hall. The Court of Queen’s Bench held that the contract was discharged for frustration on the ground that it contained an implied condition that the parties shall be excused from performance if the subject matter of the contract is destroyed. [7]

The definition of doctrine of frustration in Malaysia can be derived under Section 57(2) of Contracts Act.

“Contract to do act afterwards becoming impossible or unlawful:

(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.”

The term frustration is not used but instead referred to as impossibility and unlawful event. Unfortunately the absence of the definition of the word impossible suggests that common law principles will inevitably come into play whenever the court seek to ascertain whether or not the doctrine of frustration is applicable. In support of this, Sinnadurai Visu had also had in his view that when it comes to Section 57 of the Contracts Act, the two main instances, impossible and unlawful shall be envisaged. [8]

Contrary to frustration, unlawfulness of consideration would render a contract void ab initio. This falls under Section 24 of the Contracts Act [9] but there are several exceptions for this section which is stated in Section 26 of the same Act.

Restraint of marriage is governed under Section 27 of the Contract Act [10] .For the restraint of legal proceeding is under Section 29 of the Contracts Act [11] .

It is to note that under Section 57(3)(c) of the Contracts Act is a situation where a contract is not frustrated but void ab initio.

“(c) A contracts to marry B, being already married to C, and being forbidden by the law to which he is subject to practise polygamy. A must make compensation to B for the loss caused to her by the non-performance of his promise.”

The illustration shows that the doctrine of frustration can be only applied after the formation of the contract. Nevertheless, in illustration C of Section 57, it does not become unlawful because of the change of circumstances after the formation of the contract which A could not prevent. It is unlawful from the contract itself because polygamous marriage is illegal and hence, it is void ab initio and not frustrated.

This is a clear distinction between the contracts of void ab initio and contract of frustration.

Section 33 of the Contracts Act also revolves around the doctrine of frustration:

“(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.

(b) If the event becomes impossible, such contracts become void.”

Even here, it is clearly stipulated that frustration occurs after the contract is made ie ‘..until that event has happened’.

In addition to that, frustration is only relevant when there is a change of circumstances in the agreement which makes the parties impossible to perform.

To illustrate, in the case of Goh Yew Chew & Anor v Soh Kian Tee [12] , the appellants agreed to construct two buildings on land belonging to the respondent. The respondent paid $5,000 to the appellant as earnest money and later it was found that owing to an encroachment of a neighbour’s house into the land it was not possible to build the buildings according to the plans.

The respondent claims back his $5,000.It was held that in the circumstances it was impossible ab initio to perform the contract. The respondent was entitled to the balance of the deposit after deduction of all reasonable expenses incurred by the appellants. [13]

The rationale that underlies in this case is that, the doctrine of frustration is not applicable on the facts, if impossibility existed before the formation of the contract.

In any case where the occurrence of a frustrating event was self induced and caused by a default of a party, the party will not be discharged of the contract. [14]

In the case of Standard Chatered Bank v Kuala Lumpur Landmark Sdn Bhd where the plaintiff loaned $20 million to a third party and the defendant company charged certain lands to the plaintiffs to secure repayment of the loan. After the third party did not make any payment of the loan and interest, the plaintiffs commenced legal proceedings [15] for sale of charged lands under the in order to satisfy the debt. On 3rd June 1989, it was agreed that the defendant should pay $2million to the plaintiffs and deliver a bank guarantee providing for the payment of $18m to the plaintiffs on demand before 22nd December 1989.The legal proceedings were suspended and the defendants paid the $2million.However,an injunction was served by Monsia Investment Pte Ltd restraining both parties from completing any manner upon the redemption of the agreement. As a result the defendants could not comply with the redemption agreement and pay $18million to the plaintiffs.

The Plaintiffs then revived and pursued their claim against the defendants for foreclosure of the charged lands in court. Allowing the plaintiffs application, it was held that, due to the injunction obtained by Monsia Investment Pte Ltd which restrained the parties for redemption, the agreement had been rendered impossible to perform within the terms and conditions of the agreement. The very essence of the agreement had been frustrated as the performances of the same would be a radical change of its original terms and condition. The right of foreclosure is stated under a statutory right [16] .

Here, the redemption agreement suspending the right of the plaintiffs to exercise their right of foreclosure had been frustrated by the injunction.

It is now imperative for us divulge on the fact that the courts, will not permit the doctrine to be used as a means of escape for a party that has simply entered into a bad bargain.

In Krell v Henry [17] , the defendant had agreed to hire from the plaintiff some rooms to watch the coronation procession of King Edward VII. The King became seriously ill and the coronation processions were postponed. The defendant refused to pay the balance and the plaintiff brought a claim for the outstanding balance. The defendant counter-claimed to recover the £25 deposit he had paid. It was held that there was an implied term in the contract that the procession should take place. Accordingly, he gave judgment for the defendant on both the claim and the counter claim. The Court of Appeal dismissed the appeal, holding that the contract had been frustrated.

Similarly, the courts are reluctant to hold that a contract has been discharged merely because its purpose has been frustrated

Another common cause of frustration is during an outbreak of war or interference by the government. However in such cases, the contract depends on the circumstances of each case. [18] Another case, Berney v Tronoh Mines [19] , it was held that the invasion of Malaya by Japanese forces frustrated the contract. It can be seen in this case that the Malaysian court recognizes a contract can be frustrated and discharged by breach or default of either parties.

When a contract is discharged by frustration, the contract becomes void and it comes to an end. [20] However, the contract is not void ab initio as the contract will be only be terminated as to the future only.

In the sense of Fibrosa Spolka Akcyjna v Fairbairn Lawson Combe Barbour Ltd [21] , the lower court, a Polish company agreed to buy some machinery from an English based company. After a payment of  £1000,Germany invaded Poland and Britain declared war. However, when Fibrosa attempted to claim back their advance payment, the defendant assured that the contract was frustrated due to the war. Nevertheless it was held in the favour of Fibrosa that the company is eligible to claim back their £1000 on the basis of failure of consideration.

Effects & Remedies

Assuming that a certain agreement or contract is frustrated by the doctrine’s natural operation, it is now necessary to evaluate and examine the legal consequences it brings.

When a contract is discharged by frustration, the contract does not merely become voidable but it ‘brings the contract to an end forthwith, without more and automatically’ [22]

The said contract is only terminated in the future. Unlike those vitiated by the process of mistake, it is by all means not ab initio. Basically, it begins as a valid contract, but in turn comes to an automatic and sudden end, the moment that the agreement is frustrated.

Before we begin examining the consequences, it is to note that the effects and remedies of frustration in Malaysia is not a straightforward affair where we can put away in a few words.

The Developments of Relevant Sources of Law

Under Section 57(2) of the Contracts Act 1950, it was mentioned in brief that a frustrated contract ‘becomes void’. Restitutionary remedies are then provided for under Sections 57(3) & 66 of the same Act, and/or under Sections 15 and 16 of the Civil Law Act 1956, which we will examine in detail later.

Under the common law, the effect of frustration is to release parties to a contract of any future obligations but leaving intact any legal rights already accrued or money paid. Initially, the general rule here was that the claimant could not recover the advance already paid but also liable to pay the remaining sum which was due before frustration occurs [23] .

The harshness of this rule was then mitigated by the House of Lords decision in the Fibrosa’s case [24]

The rule in Fibrosa’s case stated that a claim for money received was quasi-contractual in nature, hence recovery was entirely based on the ground of a total failure of consideration. The ruling in Fibrosa’s case has been followed in numerous Malaysian cases [25] Goh Yew Chew & Anor v Soh Kian Tee [26] being a major example of the Fibrosa’s rule being applied in Malaysian courts.

The Dilemma of The Contracts Act 1950 and Civil Law Act 1956

However, the landmark judgement in the Fibrosa’s case was deemed to be inadequate in terms of facilitating justice under the common law. Hence, statutory intervention comes into play in the form of the Law Reform (Frustrated Contracts) Act 1943 and this Act allowed English courts much wider discretion in dealing with frustrated contracts. Malaysia then adhered to the developments on English Law on frustration by re-enacting substantially the 1943 Act in Sections 15 & 16 of the Civil Law Act 1956. To our surprise, it is still a debatable matter whether Sections 15 & 16 govern the consequences of frustration, over Sections 57 & 66 of the Contracts Act 1950 [27] ’ [28] . Although Sections 57 & 66 of Contracts Act 1950 does not contain any word or phrases with ‘frustrate’ being the root word, but with evidence of recent cases proves that the Malaysian courts are still greatly in favour of Sections 57 & 66 to handle with frustrated contracts [29] . Section 66 is still being applied in a number of cases where a contract has been deemed frustrated within the meaning of Section 57(2) of the Contracts Act [30] .

Under Section 66 of Contracts Act 1950, the courts may order a refund of deposit, if they found that the contract had been frustrated. For instance, I draw the example of the decided case of Lee Seng Hock v Fatimah bte Zain [31] , where Siti Norma Yaakob JCA ordered a refund of deposit under Section 66 based on the fulfilment of requirements laid down in Section 57 of the same Act.

It is to note that under Section 66, the courts may order a certain party in a contract who had received any form of advantage, to make compensation or restore it for the other party in the contract. However, the courts does not have equal power to make any order in the favour of the party ordered to restore the benefit, even if said party himself had incurred some form of expenses or suffered any consequential loss. In such situations, Sections 15 & 16 of the Civil Law Act provides a fairer or more equitable remedy.

As mentioned earlier, it is clear to us that Sections 15 & 16 were introduced into Malaysia for the same and exact reason the 1943 Act was introduced in England; to defeat the inadequacies of the common law. Section 15, like its English version, provides that the 2 sections apply ‘where a contract has become impossible of performance or been otherwise frustrated’. However, both under the Civil Law Act, and the 1943 English Act, the phrases ‘impossible of performance’ and ‘otherwise frustrated’ are not expressly defined. English common law compensate for this disadvantage while in Malaysia, the courts look upon Section 57(2) to give meaning to the above phrases, although, no terms rooting from the word ‘frustrate’ is used.

Although detailed provisions for relief are provided in Sections 15 & 16 of the Civil Law Act, the Malaysian courts have to a wide extent continued to utilize the provisions in the Contracts Act in granting relief for parties in frustrated contracts.

Does this mean Sections 15 & 16 is there only for the looks, and it has no legal effect upon Malaysian courts of law?

The mere thought of this would be absurd and fallacious. Although it may seem like the courts favour provisions in Contracts Act more so than the comparatively detailed Sections 15 & 16 of the Civil Law Act, but there has been instances where solely Sections 15 & 16 are relied upon in deciding a case of frustrated contracts. In the case of National Land Finance Co-operative Society Ltd v Sharidal Sdn Bhd [32] , Salleh Abas CJ relied solely on the Section 15(2) in the Civil Law Act in coming to a decision. But after this case, there seems to be not many other recent decisions that have applied these provisions in the Malaysian court [33] .

These provisions, however, do still apply to all contracts made after the coming into force of the Civil Law Act [34] , with the exceptions laid down in Section 16(5) of the same Act. By the virtue of Section 16(2), Section 15 also applies to contracts to which the Government is a party ‘in like manner as to contracts between subjects’ [35] .

For contracts that are void ab initio, the consequences of such contracts are similar but slightly different from that of frustrated contracts.

The common remedy amongst all void ab initio contracts is the remedy of rescission. It is imperative for one to acknowledge that in events where a contract is terminated by frustration, the remedy is different from rescission, in which is a remedy readily available for the innocent party in a contract that was deemed void ab initio.

Termination of a contract occurs during the natural operation of a contract, where the contract just stops which resulted in a situation where the rights and liabilities in the future will no longer be applicable. However, as mentioned earlier in this essay, rights and liabilities that already have fallen due before the frustrating/terminating event occurs are perfectly enforceable in courts of law, as examined in detail earlier.

This is to be compared and contrasted with the remedy of rescission where the contract is treated as if it has never happened. However, it is to note that the main requirement for rescission is that it must be possible for parties in such a contract to go back to their own situation before the contract was made. Logically, it is impossible to enforce a contract that has been successfully rescinded. Rescission is the main remedy available to the innocent party when certain things have gone wrong during the pre-contractual stage, such as misleading conduct or misrepresentation, undue influence, unconscionable dealing, mistake, and/or duress. In other words, if it is impossible to go back to the situation before the contract was made, then the remedy of rescission would not be available.

However, one interesting point to note is that due to the language or words used in Section 66 of the Contracts Act 1950, it is deemed to be applicable to agreements which are void ab initio. The said section provides that when an agreement is discovered to be void or when a contract becomes void, the party who has received any form of advantage under such agreement is bound to restore it to the other party or to pay sufficient compensation to the other party. Hence, Section 66 is very versatile in terms of interpretation, and it has a wide application in law. Nevertheless, the detailed application of Section 66 is different between different fields of law due to the developments of common law.

Conclusion

With the helping hands of the common law and developing statutes, it is clear and safe for us to say that our current laws governing the doctrine of frustration is in muddied waters.

With the application of 2 different sets of statute which governs the operation of frustration, along with overlapping application with certain types of void ab initio contracts, the complexity and intricacy of said fields of law would cause a problem for young lawyers, not to mention the general public. This would prove to be a problem in the long run as the courts have to spend more time and resources in interpreting relevant laws. This would also render the maxim of ‘ignorantia legis non excusat’ almost useless, as the relevant laws are too disorganised and confusing, hence the general public would have problems comprehending said laws. To reaffirm our argument, we would like to point out that our own Malaysian legal history bears stark evidence that the courts are happy enough to interpret the operation of frustration based on the Contracts Act 1950 instead of considering other seemingly better sources [36] , as we have discussed earlier in this essay. The reluctance shown here is indeed a silent call for reforms or changes in this field of law. We are of the opinion that relevant reforms would be beneficial to the general public and legal practitioners throughout the Malaysian legal industry. Of course, reality is always cruel. The need for a change does not equate to the progress. Changes are always slow due to the fact that it involves complicated procedures and bureaucratic red-tape.

But still, we firmly believe that some form of reforms must be initiated for the sake of a comparatively accessible legal environment to exist. The law must be precise and clear, for it to be accessible to the people. Better accessibility of the law would garner more respect from the people towards the law, and this is crucial for any country to develop.

But sadly, there is no other way around it to make it better.