Discharge of Contract by Frustration.pdf

DISCHARGE OF CONTRACT via the DOCTRINE OF FRUSTRATION Athirah Mohd Anuar (Lecturer) Faculty of Law, UKM...

DISCHARGE OF CONTRACT via the DOCTRINE OF FRUSTRATION Athirah Mohd Anuar (Lecturer) Faculty of Law, UKM Semester 2, 2023/2024 Here is where your presentation begins Discharge through the Doctrine of Frustration 01 Introduction 02 Instances Application of the Doctrine of Frustration  Introduction - Prior to 1863, there was a general rule requiring that contracting parties fulfill all their obligations under the contract even if such obligations had subsequently become impossible to perform. This situation brings injustice. The case Paradine v. Jane (1647) is an example of this strict application – the case established absolute liability for contractual debts (2) A contract to do an act which, after the contract is Section 57(2) made, becomes impossible, or by reason of some event Contracts Act which the promisor could not prevent, unlawful, becomes 1950 / Akta void when the act becomes impossible or unlawful” Kontrak 1950 See Illustrations (b), (d) and (e) of S.57  Section 57(2) AK Causes the contract Then the Something Contract finalized to become: contract occurs outside of (i) impossible to and executed becomes the control of the implement impossible or promisor (ii) not valid to be invalid executed (in both instances contract is frustrated and becomes void) Ramli bin Zakaria v. Govt. of M’sia 2 MLJ 257 “where after a contract has been entered into there is a change of circumstances but the changed circumstances do not render a fundamental or radical change in the obligation originally undertaken to make the contract something radically different from that originally undertaken, the contract does not become impossible and it is not discharged by frustration.” Must have occurred a fundamental or radical change and made the contract something radically different (different to what was originally undertaken) Test to apply the doctrine of frustration The fundamental or radical change must have occurred outside of the promisor’s control  Davis Contractors Ltd. v. Fareham UDC Per Lord Radcliffe “…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 of would render it a thing radically different from that which was undertaken by the contract. Non haec in foedera veni. ‘It was not this that I promised to do’… it is not hardship or inconvenience or material loss itself which calls for the principle of frustration into play. There must be as such a change in the significance of the obligation that the thing undertaken would, if performed, be a different thing from that contracted for.”  J Laufitzen AS v Wijsmuller BV (The Super Servant Two)(1990) Per Bingham LJ “The doctrine of frustration was evolved to mitigate the rigour of the common law’s insistence on literal performance of absolute promises. The object of the doctrine was to give effects to the demands of justice, to achieve a just and reasonable result. To do what is reasonable and fair, as an expedient to escape from injustice where such would result from enforcement of a contract in its literal terms after a significant change in circumstances.”  The Court of Appeal in Guan Aik Moh (KL) Sdn Bhd & Anor v Selangor Properties Bhd sets out 3 elements that must be fulfilled before the doctrine of frustration can be applied: Third, the event which is said to First, the event upon which the discharge the promise must be promisor relies as having such that renders it radically frustrated the contract must have different from that which was been one for which no provision undertaken by the contract. The has been made in the contract. If court must find it practically provision has been made then the unjust to enforce the original parties must be taken to have promise. allocated the risk between them. Second, the event relied upon by the promisor must be one which he If any of these elements are not present on the facts of a or she is not responsible. Put given case, then S.57 does not shortly, self induce frustration is bite. ineffective. 01 When the fundamentals of the 02 Death or incapacitation: 03 Non-existences of the event that forms the basis of the contract is lost or destroyed: - Condor v. Barron Knights contract: - Taylor v. Caldwell (1836) - Krell v. Henry - Appleby v. Myers (1867) - Notcutt v. Universal - Chandler v. Webster ~ Equipment (1986) (bezakan juga dari kes Herne Bay Steam Boat Co. v. Hutton 2 K.B. 683) Instances whereby the Doctrine of Frustration applies: 04 05 06 Government intervention Other instances: War: involving the fundamentals of the contract: - Berney v. Tronoh Mines - Yong Ung Kai v. Enting - Metropolitan Water Board – invasion of Malaya v. Dick Kerr & Co. by the Japanese  Instances whereby the Doctrine of Frustration is NOT Applicable 1. Performance of the contract 2. Self-Induced Frustration becones harder, more expensive or delayed The circumstances that made it Davis Contractors v. Fareham impossible for the contract to be Maritime chartered from Ocean a UDC ~ difficulty obtaining performed were created by the vessel which could only operate with materials and workers an otter trawl. Plaintiff himself. Both parties realised that it was an offence to use such a trawl without a Tsakiroglou & Co. Noblee & Thorl Maritime National Fish Ltd. v. Ocean government licence. GmbH (1962) ~ difficult voyage Trawlers Ltd. ~ ‘otter trawl’ Maritime was granted three such licences, but chose to use them in Ocean Tramp Tankers Corp v V/O Lihat : J Lauritzen AS v. Wijsmuller respect of three other vessels, with the result that Ocean's vessels could Sovfracht (The Eugenia) (1964) BV 1 Lloyd’s Rep. 1 not be used. Held: Tai Kim Yew & Ors. v Sentul Raya The contract had not been frustrated. Sdn Bhd ~ financial crisis Consequently Maritime was liable to pay the charter fee. - Maritime freely elected not to licence Ocean's vessel, consequently their inability to use it was a direct result of their own deliberate act.  What about COVID 19? The phrase ‘impossible’ in S.57 is not defined, Temporary Measures for Reducing the but: Impact of Coronavirus Disease 2019 (covid- Hong Leong Bank Bhd v Tan Siew Nam & Anor (2014) 5 19) Act 2020 MLJ 34, the Court of Appeal : To provide parties some form of temporary Acknowledged in addition to circumstances of physical or relief from legal obligations literal impossibility to perform a contract, frustration may Section 7, and contracts that fall under arise where the performance of an act: Part II “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 upset the very foundation upon which the parties rested their bargain, it can very well be said that the promisor found it impossible to do the act which he promised to do”. Whether COVID19/MCO render a contract frustrated depends on the contractual obligation. A party who seeks to rely on these would have to prove that it was beyond the control of the parties to a contract, and that such occurrence could not be anticipated when entering into to the contract.  Effect of the doctrine of frustration? Remedy? S.57(2) CA : Contract becomes void (1) What happens to the rights and obligations of the parties under a S.57(2) CA :.. becomes void when contract that is frustrated? the act becomes impossible or unlawful (2) Can any claims be made under (not ab initio) such frustrated contract? BEFORE Fibrosa Spolka AFTER Fibrosa Spolka i.e. - Krell v. Henry - Chandler v. Webster BEFORE Fibrosa Spolka Krell v. Henry Chandler v. Webster P agreed to allow D to rent a room to see the D agrees to allow P rent a room for £141 15s coronation procession of King Edward VII. A payable immediately. P pays £100. Then the sum of £25 was paid when the contract was contract was frustrated. P claims the full £100, made and the balance of £50 was due on 24 D counterclaims for the balance. June 1902. However, it was announced that the march would be postponed. P then HELD: P has to pay the balance because it demanded payment of the balance. should have been settled before the occurrence HELD: The contract has been frustrated by of the event that frustrated the contract. the cancellation of the parade. Although there is no written provision in the contract regarding the use of the room, the parade is the basis for the signing of the contract. D does not have to pay the balance The result of this case was found to be unsatisfactory because P was charged even though he did not receive any benefits from the contract.  AFTER Fibrosa Spolka Fibrosa Spolka Akcyjna v. Fairbain HELD: Lawson Combe Barbour Ltd. R is an English company who agreed to sell a Court of Appeal ~ type of machine to A (Fibrosa - a Polish Applying the principle in Chandler v. company) & send it to Gydnia, Poland. The agreed price was £4800 and the down Webster, A’s claim failed. payment was £1600, out of which Fibrosa had paid £1000. Before the delivery date of House of Lords ~ the machine, the GB Government declared The £1000 can be claimed because there is a war on Germany and the Germans then total failure of consideration. In this case, A did occupied Poland. The contract was not receive what was promised. The claim was frustrated. Fibrosa is asking for £1000 back. R made not based on the contractual provisions. refused to pay because a lot of money had It arises from the situation that occurred in the been spent to make the machine. case, and the law provides a remedy for that situation.  After Fibrosa Spolka ❑ The Fibrosa case can reduce injustice, but the decision made is still seen to be unfair for one party. ❑ E.g. a situation where there is an advance payment. A has spent a sum of money to perform the contract, but when frustration occurs, the advance payment must be returned. So, A not only did not get the contracted money, but A even have to keep goods that were not useful to him. ❑ The court in the Fibrosa Spolka case suggested that legislation be enacted to solve this problem. UK - Law Reform (Frustrated Malaysia – Civil Law Act 1956 (CLA), Part VI Contracts) Act 1943 - LR (FC) Act is not applicable in Malaysia Section 15 – determine the contractual remedies Section 16 – adalah tentang pemakaian seksyen 15 Section 15 CLA - Adjustment of rights and liabilities of parties to frustrated contracts (1) Where a contract has become impossible of performance or been otherwise frustrated, and the parties thereto have for that reason been discharged from the further performance of the contract, subsections (2) to (6) shall, subject to section 16, have effect in relation thereto. (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, in the case of sums so paid, be recoverable from him as money received by him for the use of the party by whom the sums were paid, and, in the case of sums so payable, cease to be so payable: Provided that, if the party to whom the sums were so paid or payable incurred expenses before the time of discharge in, or for the purpose of, the performance of the contract, the Court may, if it considers it just to do so having regard to all the circumstances of the case, allow him to retain or, as the case may be, recover the whole or any part of the sums so paid or payable, not being an amount in excess of the expenses so incurred.  Application of Section 15 CLA Keputusan kes Fibrosa telah diaplikasikan dalam: Money was PAID BEFORE Frustration KUNG SWEE HENG & ANOR. v. PRITAM KAUR (1948) Example: In the contract between X and Y, X has paid an advance of RM5,000. If the P buys a house from D for $7,800. A deposit contract is frustrated X can get back the of $500 was paid on Dec. 5. 1941. Then on RM5,000. Dec. 8. 1941 the situation of World War II began to hit Kedah. The contract However, if Y has incurred expenses of transaction stopped because P was in fear RM3,000 to execute the contract, then Y and the Japanese side prohibited any can take RM3,000 and return RM2,000 to X. transfer of land ownership. Now, P requests If the expenses incurred reach RM7,000 specific performance against Def. then Y can only keep RM5,000 and cannot request the difference of RM2,000. HELD: The contract is frustrated. Applying the principles of the Fibrosa case, P is entitled to recover the deposit of $500.  Application of Section 15 CLA Section 15(3) CLA Money that SHOULD HAVE BEEN PAID BEFORE Frustration According to this provision, if Y Example: The money that should have been receives benefits from the contract, paid before the frustration was RM5,000 but other than the money referred to in it was not paid. Then the frustration action S.15(2), then the Court may allow X to occurred. The RM5,000 does not need to be recover such benefits if the court paid. thinks it is fair in the case. However, if Y has incurred expenses of This provision aims to avoid unjust RM3,000; Y can claim the RM3,000. But, if Y incurs expenses of RM7,000; Y can enrichment by one party in the only claim as much as RM5,000. contract. See also the application of Seksyen 66 CA – remedy of restitution According to Privy Ccouncil in Govindram Seksaria “[I]t is well to emphasize that when ‘frustration’ & Anor. v Edward Radbone (1947) LR 74 IA 295 in the legal sense occurs. It does not merely (PC): provide one party with a defense in action brought by the other. It kills the contract itself “Compensation for an advantage may appear to be a and discharges both parties automatically…” contradiction in terms, since compensation connotes a ~Per Viscount Simond in Joseph Constantine measure of loss of damage not the value of an Steamship Line v. Imperial Smelting Corporation advantage. It should be noted that in section 56 the (1942).~ expression used is ‘compensation for any loss’ and that The court will not arbitrarily declare that a under section 64 the party rescinding the contract is to contract is terminated because of frustration. restore benefit. Under section 65 the alternatives are ‘to restore any advantage’ or ‘to make compensation for it to the person from whom he received it’. This (Recall the basic principles of contract ~ freedom must mean valuing or quantifying in money the of contract & integrity of contract) advantage retained, if retained it be.” Courts will apply the 'radical change of contractual obligations' test and this will depend Its application can be seen in the case of Public Finance on the facts of the case. Bhd. v. Ekhwan bin Saring dan Lee Seng Hock v Fatimah bte Zain. Thank you