The doctrine of frustration is codified in Section 57(2) of the Contracts Act 1950 (“s.57”). It states: “(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.”
Based on this provision, it is clear that a contract is frustrated when there is a change in the circumstances (the event), which renders a contract legally or physically impossible of performance.
While this provision governs the doctrine of frustration, it does not and cannot define or set out the circumstances that fall within this provision. Do also note that the word “frustration” or the like does not appear in this provision.
This decision-making of whether a case falls within this provision is in safe hands. The courts are tasked to determine, based on the facts of the case, whether the doctrine of frustration applies. It must be noted that doctrine of frustration is different from force majeure clause. In this write-up, only the latter is discussed.
The Elements of Frustration
To determine whether frustration applies, the courts are guided by the statutory provision of s.57 as well as case law or authorities that basically means cases that had been decided by the courts. The local cases would also show that the Malaysian Judiciary has been applying english cases. As explained by Gopal Sri Ram JCA (as he then was) in Guan Aik Moh (Kl) Sdn Bhd & Anor v. Selangor Properties Bhd [2007] 3 CLJ 695, there are three elements woven into the fabric of the doctrine of frustration.
(i) The event is not covered by the contract
First, the event upon which the promisor relies as having frustrated the contract must have been one for which no provision has been made in the contract. If provision has been made then the parties must be taken to have allocated the risk between them.
(ii) The event happens through no fault of parties
Second, the event relied upon by the promisor must be one for which he or she is not responsible. Put shortly, self-induced frustration is ineffective.
(iii) The original promise becomes radically different
Third, the event which is said to discharge the promise must be such that renders it radically different from that which was undertaken by the contract. The court must find it practically unjust to enforce the original promise.
If any of these elements are not present on the facts of a given case, then s. 57 does not bite. Having these three elements in mind, we now look into the case law to comprehend as to what kind of circumstances may fall under the doctrine of frustration.
Legal Principles and Illustrations on Frustrating Events
In Taylor v Caldwell (1863) 3 B & S 826, the claimant hired out a music hall in Surrey for the purpose of holding four grand concerts. However, a week before the first concert was due to take place the music hall was destroyed by an accidental fire. The claimant sought to bring an action for breach of contract for failing to provide the hall and claiming damages for the expenses incurred. It is ruled that the contract had been frustrated as the fire meant the contract was impossible to perform. Hence, the claimant’s action for breach of contract failed.
Detention for two years had been recognised as a frustrating event in the case of Sathiaval Maruthamuthu v. Shell Malaysia Trading Sdn Bhd [1998] 1 CLJ SUPP 65. The plaintiff in this case was employed by the defendant. The plaintiff was arrested by the police and was thereafter detained for a period of two years. While under detention the plaintiff informed the defendant of his whereabout and status, and following that, the defendant terminated the plaintiff’s employment on ground of frustration of contract. The plaintiff alleged that his dismissal was unlawful and constituted a breach of contract. The defendant contended that the plaintiff’s employment was frustrated by his detention. The Court agreed with the defendant and held that the plaintiff’s contract of service with the defendant was frustrated by virtue of his detention aforesaid such as to discharge the defendant of the said contract of employment. It was explained that the circumstances were such that one can reasonably find that there had been a radical change of what had been undertaken by the parties in the employment contract to conclude that it had been frustrated by the plaintiff’s detention.
Under the law of frustration, self-induced frustration is not a frustration. This is evidenced from the case of Guan Aik Moh (Kl) Sdn Bhd & Anor V. Selangor Properties Bhd [2007] 3 CLJ 695. In this case, the plaintiff purchased the car from Primakar and let it to the first defendant pursuant to a hire-purchase agreement entered into between them, with the second defendant guaranteeing repayment. The car was later seized by officers of the Royal Customs for default in the payment of the actual duty payable on the car. The defendants argued that the seizure of the car frustrated the contract. The Court rejected this argument. It is opined that it was for the first defendant to have ensured that the duties were paid by its agent. It did not. It merely relied on its agent to make payment. That did not happen. So, if this is a case of frustration then it was self-induced.
It must also be noted that a contract does not become frustrated merely because it becomes difficult to perfrom as being ruled in Pacific Forest Industries Sdn Bhd & Anor v. Lin Wen-Chih & Anor [2009] 6 CLJ 430:-
“A contract does not become frustrated merely because it becomes difficult to perform. If a party has no money to pay his debt, it cannot be considered impossible to perform as it is not frustration. Neither can he plead frustration because the terms of the contract make it difficult to interpret. If it cannot be performed or becomes unlawful to perform, then the party who is to perform his part of the bargain can plead frustration.”
Similarly, in the case Kin Nam Development Sdn. Bhd. v. Khau Daw Yau [1984] 1 CLJ Rep 181, the Court ruled that to invoke the doctrine the appellant must show that the completion of every one of these contracts is in substance a different obligation from what it had previously agreed to i.e., a new agreement altogether.
Also in Ocean Tramp Tankers Corp V. V/O Sovfracht (The Eugenia) [1964] 2 QB 226, “a negligent act by the defendant may well amount to self-induced frustration because such an event is not altogether outside the control of the defendant; indeed, he is the (albeit unintentional) author of it.”
The doctrine of frustration applies only in circumstances where the supervening event is beyond the control of the parties to the contract. It follows that where the alleged frustrating event is caused by the deliberate act or decision of one of the parties, or by his negligence, the doctrine will not apply. (See: Big Industrial Gas Sdn Bhd V. Pan Wijaya Property Sdn Bhd & Another Appeal [2018] 9 CLJ 1)
It is pertinent to note that the effect of frustration is that it puts an end to the contract. The promisor is discharged from performing its obligation or promise and will not be penalised with damages for not performing its promise. The contract becomes void.
Keywords of Frustration
Based on the discussion above, the keywords of frustration are:
- Frustration arises after the formation of the contract.
- There frustrating event cannot be prevented and it is through no fault of the promisor.
- The supervening event is beyond the control of the parties to the contract.
- The contract has fundamentally or radically changed.
- The parties did not contemplate at the time of the agreement.
Comments and Conclusion
Based on the authorities, it is possible to rely on a pandemic such as Covid-19 in the instant case depending on the terms of the contract.
For example, a contract with a travel agency to travel to Taiwan may be argued to have been frustrated by the temporary entry ban imposed by Taiwan provided that the agreed travelling time falls within the ban period. Similarly, your long-awaited cruise trip with Dream Cruise would be frustrated as well.
However, to argue that a 2-year tenancy agreement is frustrated due to Covid-19 and MCO would be an uphill battle as the tenancy agreement is still capable of performance despite Covid-19 and MCO. Unless, MCO lasts for 2 years which basically long enough to render the whole tenancy agreement incapable of performance.
It must be borne in mind that the relief or remedy of frustration is discharge. Therefore the event must be radical and severe enough to render the agreement impossible to perform. It cannot be a temporary event that merely affects the contract. It must be fundamental, going to the root of the contract.
Hence, the million-dollar preliminary question is whether you can still perform your obligation despite the effects arising from Covid-19? Bearing in mind that facing difficulties in performing are not sufficient.
As the threshold to rely on frustration is high, it is pertinent to include express and clear terms to include and cater for situations such as pandemic Covid-19 that affects the contract but insufficient to frustrate the whole agreement, for parties to make necessary adjustment or arrangement such as reduction of price or rental or temporary waiver of payment. This however, may lead to uncertainties and more arguments.
The contents of this article or write-up are for informational purpose only. The information provided does not and is not intended to constitute legal advice. For legal advice, please contact us.