DISCHARGE BY FRUSTRATION

INTRODUCTION

• 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.
• 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".
• In a contract that is frustrated, the law treats the contract to be
terminated automatically and forthwith due to the frustrating event. In
this respect, to emphasise the key concepts contained in the Contracts Act
set out earlier in the introductory chapter to this book, 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).
• It is also different from void agreements which are unenforceable by law
due to unlawful consideration or object and in some cases of mistakes.
The distinction is important as the statutory reliefs provided in ss 65 and
66 of the Contracts Act makes clear reference to these terms.
• Section 65 applies to voidable contracts while s 66 applies to agreement
"discovered to be void" or "when a contract becomes void".
• Thus, in cases of frustration, a contract that becomes void under s 57(2),
relief is provided under s 66.
 Frustration occurs "after the contract is made"
• Under s 57(2), for the doctrine of frustration to apply, the supervening event
must be one that occurs "after the contract is made". 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, thus, disabling the performance promised.
• In Goh Yew Chew v Anor v Soh Kian Tee [1970] 1 MLJ 138, FC , the appellants agreed
to construct two buildings on land belonging to the respondent. The respondent paid
$5,000 to the appellants as earnest money. 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. The respondent took action to claim the return of
the $5,000. The trial judge found that in the circumstances it was impossible ab initio
to perform the contract. He held that the respondent was entitled to the balance of
the deposit after deduction of all reasonable expenses incurred by the appellants.
• The Federal Court affirmed the trial judge's decision. 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.
 Frustration not self-induced: "event which the promisor could not prevent"
• Under s 57(2) of the Contracts Act, the supervening event must be
something that "the promisor could not prevent".
• A frustrating event which was self induced and caused by a default of a
party will not discharge the party from the contract.
• In Standard Chartered Bank v Kuala Lumpur Landmark Sdn Bhd [1991]2
MLJ 251, 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... It appears that the
language of the section envisages two main instances of frustration - when a
contract to do an act becomes (a) impossible or (b) unlawful. The frustration
should be caused by some supervening and subsequent event occurring after
the formation of the contract. Furthermore, it should be some event which
the promisor could not prevent, as a 'self-induced frustration' does not
discharge a party of his contractual obligations.
• In Yee Seng Piantantions Sdn Bhd v Kerajaan Negeri Terengganu & Ors [2000]
3 MLJ 699, CA, the Court of Appeal held that the doctrine of frustration is
inapplicable where there is fault on the part of the party pleading it. In this
case, involving an alienation of land, 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. It
was, thus, not a supervening act. According to the Court, "self-induced
frustration is no frustration".
• The Court referred to Ocean Tramp Tankers Corporation v VIO Sovfracht (The
"Eugenia") [1964] 1 All ER 161, CA. In The "Eugenia", the owners of the
Eugenia let her to the charterers "for a trip out to India via the Black Sea".
During the negotiations leading up to the charter party, both parties realised
that there was a risk that the Suez Canal might be closed, 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; however, they came
to no agreed terms to meet that possibility. The vessel embarked on its journey
and subsequently entered the Suez Canal, where she became trapped due to
the canal being blocked. The charterers claimed that the charter party had
been frustrated by the blocking of the canal.
• The English Court of Appeal held that the doctrine of frustration was
inapplicable to the present facts because, although the parties foresaw that
the Suez Canal might become impassable, they had not provided for it.
• Lord Denning emphasised that the doctrine of frustration applies, not so
much because the supervening event was unexpected, but more
importantly, 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", as
if that were an essential feature. But that is not so. It is not so much that it is
"unexpected", but rather that the parties have made no provision for it in
their contract ... here, the parties foresaw that the canal might become
impassable. It was the very thing that they feared. But they made no
provision for it.

TEST FOR FRUSTRATION

• The Contracts Act does not define the word "impossible" provided in s
57. In the Indian Supreme Court decision of Sayabrata Ghbse v
Mugneeram Bangur & Co. AIR 1954SC44. 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.
• 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, it can very well be said that the promisor finds it impossible
to do the act which he promised to do.
• However, most Malaysian cases have applied the test formulated by the
House of Lords in Davis Contractors Ltd v Fareham UDC [1956] AC 696,
HL. 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.
• In this case, the appellants agreed to build for the respondents 78 houses
within eight months. For various reasons, the chief of them being lack of
skilled labour, the work took 22 months. 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. However, this was not the case and the resulting delay
amounted to frustration of the contract.
• The House of Lords held that the contract had not been frustrated; 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.
• The test in Davis Contractors was explained by Lord Denning in The
"Eugenia" discussed above as follows:
To see if the doctrine applies, you have first to construe the contract and see
whether the parties have themselves provided for the situation that had
arisen. If they had, there is no frustration and the contract applies. If they
have provided for it, the contract must govern. There is no frustration. If
they have not provided for it, then you have to compare the new situation
with the old situation for which they did provide. Then you must see how
different it is. 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 ...
It must be positively unjust to hold the parties bound..
• In The "Eugenia", the Court of Appeal held that the doctrine of frustration
did not apply as it was self-induced.
• Further, it did not pass the test in Davis Contractors Ltd [1956] AC 696, HL
that is, the event had caused the performance of the contract "a thing
radically different from-that-which was undertaken by the contract".[1964]
1 All ER 161 at 166.
• Subsequent to the House of Lords decision in Davis Contractors, there have
been other varied formulations of the test for frustration. In National Carriers
Ltd v Panalpina (Northern) Ltd,"18 [19811 AC 675, HL.
• 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; in such case the law declares both parties
to be discharged from further performance.
• In J Lauritzen AS v Wijsrnuller BV (The "Super Servant Two") [1990] 1 Lloyd's
Rep 1, CA. Bingham LJ set out five principles of law on the doctrine of
frustration as follows:
1. The doctrine of frustration was evolved to mitigate the rigour of the common
law's insistence on literal performance of absolute performance;
2. 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;
3. Frustration brings a contract to an end forthwith; without more and -
automatically;
4. 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;
5. The frustrating event must be without blame or fault on the side of the party
seeking to rely on it. Ibid, at 8.
• In this case, the defendants contracted to carry the plaintiffs' drilling rig from Japan to a
delivery location off Rotterdam by one of two transportation units, namely Super
Servant One or Super Servant Two. The defendants had intended to use Super Servant
Two for this contract, as they had entered into other contracts which they could only
perform using Super Servant One. However, Super Servant Two sank. The defendants
then informed the plaintiffs that they would not carry out the transportation of the
drilling rig. The issue which arose was whether the contract was frustrated due to the
loss of Super Servant Two. The Court of Appeal held that the loss of Super Servant Two
was not a supervening event such as to frustrate the contract, as the defendants had
an alternative, namely, to use Super Servant One to perform the contract after Super
Servant Two had sunk, which they had elected not to do.
• In Malaysia, the House of Lords decision in Davis Contractors was applied by the Federal
Court in Ramli bin Zakaria & Ors v Government of Malaysia. [1982] 2 MLJ 257, FC. In
this case, the appellants were a group of 86 vocational school teachers who were
successful in their application for teacher training. 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. However, by the time they completed their
course of training, the UTS scale had been abolished and the Abdul Aziz scheme had
come into force. The appellants were offered salaries under the Abdul Aziz scheme.
• The appellants claimed that they should have been paid salaries and allowances
under the UTS scheme. 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 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.
• 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 contract does not become impossible and it is not discharged by
frustration.
• In Lai Kok Kit @ Sulaiman Lai bin Abdullah MBf Finance Bhd [2000] 3 MLJ 136,
CA., 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" .
 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; and (ii) s 12 of the
Specific Relief Act on partial frustration.

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.
(b) If the event becomes impossible, such contracts become void.
• 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; [198312 MLJ 211, FC. where the sale and
purchase of a property was subject to the approval of the Foreign
Investment Committee (FIC), and approval was not obtained.
• In this case, 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. There was no promise, nor guarantee that such
approval would be given. Such a condition, in our judgment, is more than a
mere essential stipulation of the contract, a breach of which entitles an
innocent party to regard itself as discharged from further performance and
to sue for damage. It is, however, a condition which is known in the law of
contract as a contingent condition, the effect of which is that a contract shall
not take effect unless and until the condition is fulfilled.
Until the FIC approval was given, liability for further performance remained
unenforceable, 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. This is the effect laid down by s 33(a) of the
Contracts Act.
As the approval in this case was refused, it means that contingent event
becomes impossible and the agreement therefore becomes void in accordance
with s 33(b) of the Contracts Act.
• 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; [1990] 3
CU (Rep) 37; [1990] 2 MLJ 163. In this case, 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, the club would do so. 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.
The contingent event agreed to by the parties has become impossible to
perform and thus, the agreement becomes void under s 33(b) of the Contracts
Act.
• 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. In this case, the
plaintiff sued as the widow of Chong Sau Nan, the deceased.
• The deceased as borrower and the defendant as lender had entered into a
loan agreement whereby the borrower agreed to take, and the defendant
to approve, 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. After the loan agreement was
executed the borrower passed away without taking up the mortgage
assurance. 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. Thus the agreement was rendered
void under 57(2) of the Contracts Act.
• Additionally, the contract in question was a contingent contract and s 33
also applied. In Lee Seng Hock v Fatirnali bte Zain [1996] 3 M[J 665, 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.
 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, 1950, a
contract is not wholly impossible of performance because a portion of its
subject-matter existing, at its date, has ceased to exist at the time of the
performance.

• Section 12 of the Specific Relief Act provides for partial frustration where
only a portion of its subject matter, which existed at the date of contract, has
ceased to exist at the time of performance.
• Following s 12, notwithstanding s 57 of the Contracts Act, the contract may
still be performed.
• Section 12 was referred to in Wong Slew Chong Sdn Bhd v Anvest Corporation
Sdn Bhd (No I) 34 [2002] 3 MLJ 143, CA. In this case, the subject matter of the
sale and purchase agreement was land measuring 9,377 sq m. However, 1,220
sq m was later acquired under the Land Acquisition Act 1960 (Revised 1992)
Act 486. The Court of Appeal referred to s 12 and held that the part acquired
was only a small portion of the contract. The contract can still be performed
and the remaining issue was payment of compensation for the deficiency.
 INSTANCES OF FRUSTRATION
• There are many cases that have raised the issue of frustration.
• The courts have referred to s 57 of the Contracts Act and also applied the
test in Davis Contractors to decide the matter. Some instances of
frustration are set out below as follows: (i) effect of war and fire; (ii)
change in the law; (iii) acquisition of land; (iv) failure to obtain approval;
(v) failure to obtain loan; (vi) economic crisis; (vii) detention of employee;
(viii) seizure of goods by customs department; and (viv) effect of
injunction.

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. A's Government
afterwards declares war against the country in which the port is situated.
The contract becomes void when war is declared." In Berney v Tronoh
Mines Ltd [1949] MLJ 4 the plaintiff sued for breach of a contract of
service. The High Court agreed with the defendants' contention that
consequent on the Japanese occupation of the State of Perak, the contract
Of employment between them and the plaintiff was discharged by
frustration.
• In Tiong Goon Toon v Credit Leasing Corporation Sdn Bhd [1986]1CLJ604
the chargors argued that since the machinery, the subject matter of the
leasing agreement, had been destroyed in a fire at a factory of the
borrowing company, the leasing agreements were, thus, frustrated, so
nothing more could be said of them, or the rent payable thereunder. The
High Court applied the test in Davis Contractors and held that on a true
construction of the leasing agreement, rent continued to be payable in full
after the fire. The charge documents which were executed by the parties
for securing payment of such rent, would continue to remain in force
because the contracts or the leasing agreements in question, were not
only wide enough to apply to the new situation, that is, the fire, but had
so obviously stipulated for the destruction of the said machinery for any
untoward incident such as fire.

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, inter alia, to the
property being freed from encumbrances and the permission of the Perak
Government being obtained.
• The plaintiffs paid the purchase price and defendant paid off the only charge on the property.
Subsequently there was a change of law, 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. The defendant pleaded that the change of law had frustrated the
agreement.
• The High Court held that the contract had not been frustrated. 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 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 reinstatement of the charge was only to ensure repayment. The law had
not made the performance of the contract impossible and an order for specific performance was
made.
• 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. This forced the tenants to leave their premises which they rented at a
monthly rental. The High Court held that this event did not frustrate the tenancy contract, 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, they would not have considered that such an order would render the
performance of the contract impossible, since if either party wished he could have terminated
the tenancy by one month's notice.
• 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, 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 first defendant
subsequently informed the plaintiffs that it would vacate the premises, thereby
terminating the tenancy, due to its merger exercise with the second defendant.
Resulting from the premature termination, the plaintiffs re-tenanted the premises to a
third party at a lower monthly rental. The plaintiffs took action against the defendants
for the losses suffered by it as a consequence of the premature termination of the
agreement. 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. The High
Court agreed with the first defendant's submission. 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. It was not self-induced frustration. Therefore, the agreement had
come to an end by way of frustration.
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. 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, the agreement to sell the land had become
invalid and void.
• Refer to the full case.
• In Lee Seng Hock v Fatimah binti Zain [1996]3 MLJ 665; [1997]1 AMR 34,
CA the Court of Appeal held that the sale and purchase agreement in this
case has been frustrated. 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 answer this in the affirmative... 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. For that reason, 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.

Failure to obtain approval

• In Murugesan v Krishnasamy & Anor 44 [1958] MLJ 92 the defendants
were in occupation of land under Temporary Occupation Licence. They
subsequently applied for EMR titles in respect of the land.
• 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.
Subsequently, the defendants' application for EMR titles were refused. The plaintiff
thereupon claimed the return of the money paid by him as the contract had
become impossible of performance.
• 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.
• 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. In order to cut the timber, a
licence or permit from the forests department was necessary. The defendant did
his best to obtain the necessary licence, but this was refused. The High Court held
that when the application was refused, the contract became impossible to
perform.
• Sinnadurai submits that the views expressed in these two decisions may
be questioned. In Murugesan and Yang Ung Kai, both the parties knew
that permission were necessary for the execution of the contract. The
parties should, therefore, have made provision in the contract for the
allocation of the risk in the event that permission was not granted.
Alternatively, it may be argued that the contracts were conditional
contracts, that is, the granting of the permission was a condition
precedent for the contract to come into force.
• However, following the Court of Appeal's decision in Dato Yap Peng & Ors
v Public Bank Bhd & Ors [1997]3 MLJ 484,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, the first appellant,
the majority shareholder of the second-to fifth appellants, had guaranteed
various loans given by the five respondents (they were all banks), to the
second to fifth appellants. To each of the banks, one or more of the
appellants had provided some form of security. Subsequent to these loan
agreements, Bank Negara, acting under the powers conferred upon it by
Regulation 8(1) of the Essential (Protection of Deposits) Regulations 1986,
issued the Essential (Protection of Deposits) (No 14) Order 1986. The
effect of the Order was to impose a prohibition upon the first appellant.
• and all companies in which he had an interest from dealing, either by
themselves or through their agents, with their monies, properties or
assets. However, 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. Upon the breach of the loan agreements, the five
banks took steps, in some cases with the prior approval of Bank Negara, to
enforce their rights to recover monies due under the loans. 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, inter
alia, frustrated in the light of the Order made by 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. On the facts, as there was a
provision for the appellants to obtain the prior approval of Bank Negara,
and as it was for the appellants to make such an application to Bank
Negara, the contract would only be frustrated if and when such
application was made and it was rejected by Bank Negara.
• 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, leaving aside for the moment contracts affected by war, it is settled
law in England (and on the evidence also in India) that a supervening
prohibition of some contractually undertaken obligation, which can be
overcome by obtaining a licence, 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. If this is uncertain, then his obligation is to use his best
endeavours to obtain the necessary licence, and the contract then only
becomes frustrated if and when all such efforts have failed.

Failure to obtain loan

• In Maxisegar Sdn Bhd v Silver Concept Sdn Bhd & Anor [2001] 6 MLJ 762 by
an agreement in writing, the first defendant agreed to sell and the plaintiff
agreed to purchase a piece of land in Ulu Selangor. The plaintiff paid an
earnest deposit and part of the purchase price. According to the plaintiff, the
balance outstanding sum was to be paid by the plaintiff after it could obtain
a loan. 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. However, due to the economic recession and Bank
Negara Malaysia's circular restricting local financial institutions and banks
from giving out loans, the plaintiff failed to obtain the said loan.
• The plaintiff argued that these supervening events had caused its agreement
with the first defendant to be frustrated. The plaintiff sought, inter alia, 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.
• The High Court referred to Universal Corporation v Five Ways Properties Ltd
[1979] 1 All ER 522. that the doctrine of frustration cannot apply merely
because a purchaser finds that he does not have the money to complete a
contract. The High Court held that when the plaintiff entered into the
agreement, it took the risk of hoping to get a loan and would have to bear the
consequence when it failed it to do so. Further, there was no provision in the
agreement that the agreement was conditional on the plaintiff obtaining a
loan in order to perform its obligations. The first defendant, on the other
hand, was ready, willing and able to perform its part of the agreement. The
plaintiff's action was dismissed with costs.
• Similarly, 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. In this case, the plaintiff agreed to
purchase a piece of land from the first defendant. Later, the plaintiff was unable to
secure the release of a loan and pay the third instalment to the first defendant. On
the issue of frustration, the High Court held that there is no supervening event
which significantly changed the nature of the subject matter of the contract, that is,
the land. 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.

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 defendant failed to deliver vacant possession of the
units within the agreed time. 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.
• defendant for liquidated damages. The defendants alleged, inter alia, 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 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. On the contrary, the condominiums were
eventually completed, albeit after a long delay. In any event for the
doctrine of frustration to apply, it was insufficient for the defendant to
merely refer to the economic crisis and the consequential dire financial
situation of its parent company. 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, 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.
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. While under detention, he
informed the defendant of his whereabouts and status. The defendant
terminated the plaintiff's contract of employment on the ground of
frustration of the employment contract. 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 High Court held that the
employment contract was frustrated by the plaintiff's detention. The
inability of the plaintiff to continue his employment with the defendant
was not due to the fault of the defendant. 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. The
circumstances were such that there had been a radical change of what
had been undertaken by the parties. Based on the principle that courts
will not grant specific performance of a contract of service, in the absence
of special circumstances, the High Court declined to grant a declaration
that the contract still subsisted.
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.
• In BBMB Kewangan Bhd v Tan Swee Heng & Anor [2002]7 CLJ 377. the
High Court held that in this situation, there was a complete failure of
consideration for the hire- purchase agreement. Following the seizure of
the vehicle, the appellant, as owner, could no longer fulfil any of the
conditions and warranties under s 7(1) of the Hire-Purchase Act 1967. 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 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, thus, frustrated. The High Court
then referred to s 66 of the Contracts Act to allow the hirer a refund of
the amount paid as instalments.
• However, a different decision was arrived at in Guan Aik Moh (KL) Sdn Bhd &
Anor v Selangor Properties Bhd [2007] 4 MLJ 201, CA . this case, the plaintiff
let a BMW motor car to the first defendant pursuant to a hire-purchase
agreement between them, under which repayment was guaranteed by the
second defendant. The car was later seized by officers of the Royal Customs
for default in the payment of duty payable on the car. The defendants
contended, inter alia, that the seizure of the car by customs officers had
frustrated the contract.
• 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;
ii) the event relied upon by the promisor must be one for which he or she is not
responsible, that is, self-induced frustration is ineffective;
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. The court
must find it practically unjust to enforce the original promise.
• On the facts, the Court of Appeal held that the seizure of the car did not amount to a
frustrating event. Two of the above three elements were absent. First, the eventuality
of lawful forfeiture had been provided for by the parties in clause 3(b) of the hire-
purchase agreement. Thus, 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 defendant did not do so but merely relied
on its agent to make payments, which was also not done by the agent. Secondly, 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. Therefore, the doctrine of
frustration embodied in s 57 of the Contracts Act did not apply.

Effect of injunction
• A contract may be frustrated as a result of an injunctive order which renders the
contract impossible of performance. In Shigenori Ono v Thong Foo Ching & Ors [1991]
3 CLJ 1852 the plaintiff agreed to buy property from the third defendant. The property
was in fact subject to an existing tenancy. The tenant (third party) took out an
injunction against the third defendant. 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.
• In Standard Chartered Bank v Kuala Lumpur Landmark [1991]2MLJ251,
the plaintiff loaned $20 million to a third party, and the defendant
company charged certain lands to the plaintiff to secure repayment of the
loan. 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. Subsequently, the plaintiff entered into a redemption
agreement with the defendant. It was agreed that the defendant should
pay $2 million to the plaintiff, and deliver a bank guarantee providing for
the payment of $18 million. The plaintiff suspended the legal proceedings
and the defendant paid $2 million. Subsequently, 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. The High Court held that the redemption
agreement suspending the right of the plaintiff to exercise its right of
foreclosure, had been frustrated by the injunction. Therefore, the plaintiff
had the right to proceed with its application for an order for sale of the
land.
• After referring to some case law, 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, the said agreement has been rendered impossible to
perform within the terms and conditions of the said agreement. 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, in that the
redemption agreement was intended to suspend the right of the plaintiff to
institute foreclosure proceedings against the charged lands, if and only if, the
defendant was able to comply with the redemption agreement within the time
stipulated in the said agreement. The effect of the injunctive order rendered the
redemption agreement to be nugatory, and under the circumstances the right of
the plaintiff to proceed with the foreclosure proceeding is no longer subject to the
redemption agreement .
• However, in Kuala Lumpur Landmark v Standard Chartered Bank
[1994]2MLJ 559.
• Anuar J, on the same facts, held that the redemption agreement was not
frustrated by the injunction. 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, it could hold the
charges as security for the performance of the plaintiff's obligation to
pay RM18 million and interest. The titles could only revert to the plaintiff
upon payment in accordance with the redemption agreement.
Consequently, it was clear that the defendant bank would not suffer any
detriment or loss of benefit or any prejudice by performing the
redemption agreement. Thus, the injunction on the Monsia suit did not
frustrate the agreement
 EFFECT OF, AND RELIEF FOR FRUSTRATED CONTRACTS
• Under the common law, when frustration occurs, it brings the contract to
an end forthwith, without more and automatically. Thus, both parties
are discharged from all future obligations after the frustrating event.
However, since such contracts are not void ab initio, in that it began as a
valid contract which now comes to an end automatically, the courts held
that each party must fulfil his contractual obligations so far as they have
fallen due before the frustrating event, but he is excused from performing
those that fall due later. This rule had brought much harshness as can be
seen in the early case of Chandler v Webster [1904] 1 KB 493.
• Refer to the full case.
• The applicable rule then was that the loss must lie where it had
fallen. 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. Although this
reduced the harshness of the common law rule, the decision could
not cover cases of partial failure of consideration and other
consequences arising out of a frustrated contract. Thus, in 1943, the
Law Reform (Frustrated Contracts) Act was introduced in the United
Kingdom.
• 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.
• Besides s 66 of the Contracts Act, 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.
Although the provisions in ss 15 and 16 are more comprehensive and give
better relief to the parties, these sections have been seldom used and
most cases of frustration allowed relief under s 66 of the Contracts Act.
• 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.
• Section 57(3) of the Contracts Act provides as follows:
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.
• This section is explained in Illustration (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".
• In this Illustration, A must compensate B as he has made a promise to
marry B which he knows is an impossible or unlawful act, A being already
married to C.
• The next part will examine: (i) s 66 of the Contracts Act; and (ii) ss 15 and
16 of the Civil Law Act.

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, 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.
• "Contract becomes void" refers to contracts that become impossible or
unlawful under s 57(2) of the Contracts Act. Section 57(2) of the Contracts
Act being the Malaysian equivalent of the common law doctrine of
frustration, when the contract becomes void, the contract is forthwith and
automatically terminated and both parties are discharged as to all future
obligations.
• Under s 2(j), "a contract which ceases to be enforceable by law becomes
void when it ceases to be enforceable".
• Without any enforceable contract, the only relief is thus restitutionary
which is provided in s 66 of the Contracts Act.
• Under s 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.
• The Privy Council in Govindram Seksaria & Anor v Edward Radbone
(1947) LR 74 IA 295, PC (Appeal from India) has explained the phrase
concerning "compensation“.
• Refer to the full case.
• Section 66 of the Contracts Act has been applied in various cases on
frustration.
• In Public Finance Bhd v Ehwan bin Saring [1996} 1 MLJ 331, the
respondent (hirer) and the appellant (owner) entered into a hire-purchase
agreement with regard to a motor car. During the course of the hiring, 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. The High Court held that when the agreement was entered into,
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.
• As the vehicle was seized and forfeited, the agreement has become void
pursuant to s 57(2) of the Contracts 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. Therefore, the appellant
must return the money they have received from the respondent who had
paid towards the purchase of the car amounting to RM57,000 in
accordance with s 66 of the Contracts Act.
• 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. The
remaining issue was the appellant's claim for the compensation awarded
under the Land Acquisition Act 1960 ( Act 486).
• 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], the respondent cannot claim any
right to such compensation. At most, he is entitled to be refunded the 10%
deposit he had paid to the respondent under section 66 of the Act [the
Contracts Act] ... 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.
 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. The relevant provisions of s 15 provides as follows:
(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, subsection (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.
• (3) Where any party to the contract has, by reason of anything done by any
other party thereto in, or for the purpose of, the performance of the
contract, obtained a valuable benefit (other than a payment of money to
which subsection (2) applies) before the time of discharge, there shall be
recoverable from him by the said other party such sum (if any), not
exceeding the value of the said benefit to the party obtaining it, as the
Court considers just, having regard to all the circumstances of the case and,
in particular -
(a) the amount of any expenses incurred before the time of discharge by the
party benefited in, or for the purpose of, 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);
and;
(b) the effect, in relation to the said benefit, of the circumstances giving rise to
the frustration of the contract.
• Unlike the Contracts Act which makes no reference to "frustration", s
15(1) of the Civil Law Act uses both terms, "contract impossible of
performance" and "frustrated contract".
• Section 15(1) provides that when a contract becomes impossible of
performance or has been otherwise frustrated, the parties are discharged
from further performance of the contract.
• 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.
• Section 15(2) provides that "in the case of sums so paid", they are
recoverable as money received for the use of the party by whom the
sums were paid, while "sums payable" cease to be payable. This means
that money which had been paid to any party before the happening of the
event of frustration is recoverable. For sums which are payable, they no
longer need to be 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.
• Section 15(2) applies to money paid or payable. Where parties have
conferred benefits other than money before the time of discharge, s 15(3)
provides for the recovery of such valuable benefit. However, the recovery
is not as of right but is subject to the Court's discretion as the Court
considers just, not exceeding the value of the said benefit, having regard
to all the circumstances of the case.
• It should be noted that for relief whether for sums paid or payable, 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. 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, FC. 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.
• 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 . In this case, the High Court
held that the plaintiffs' tenancy agreement with the defendant was frustrated
when the plaintiffs had difficulty in obtaining electricity. According to Lembaga
Lektrik Negara, the basic infrastructure was not sufficient and a sub-station
had to be constructed. 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. Therefore, the plaintiffs were entitled to a refund of
sums paid under the agreement following s 15 of the Civil Law Act.
• 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. It also applies to contracts to which the Government is a party but
certain contracts are excluded in s 16(5), that is, a charter party, contract of
insurance and certain contracts for the sale of goods.