Distinguish the circumstances where contract is frustrated

The case of Goh Yew Chew v Soh Kian Tee [1] was about a contract that is impossible to be perform. It was held by the court that the consideration was complete but it was the situation that makes the contract impossible ab initio. As refer to the decision of the judges, the judges combine the void ab initio part with a frustration which I will deal with this part at the later part of my discussion. The contract made between the parties impossible to be performed when the appellant later after they had signed the contract found out that on the land, there was an encroachment to the neighbour’s house.

At the time contract was made, the plan showed that the appellant had to construct two building on the land belongs to the respondent. However the appellant later found out that there was a part that owed to the encroachment of the neighbour’s house lot that made the land was not sufficient to construct two building on it as according to the plans. The appellant gave suggestion to the respondent to construct only one building but the respondent refused to. The problem came into existence when the respondent had made extension to the land and when the circumstances made it impossible to construct two buildings the respondent refused to followed suggestion by the appellant. Instead the respondent asked back the $ 5,000 earnest money given to the appellant. For the return of the money, the learned trial judge in favour of the respondent to get the balance of the deposit of $ 5.000 after deduction of all reasonable expenses incurred by the appellants.

Based on this case, the contract was impossible to be performed after the circumstances of encroachment prohibit them to continue according to the plan. However, the judge do not used the frustration words instead impossible ab initio.

“The learned judge in his reasoning did not refer to or mention the word "frustration" of the contract.

It was been argued that the encroachment was been found by the appellant after the contract was been made. The contract deemed to be frustrated as to the change of the circumstances. Nevertheless the judges held that the contract was impossible ab initio and not include any word of frustration of a contract. As to the view of the judges:

“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."

Generally there are differences between the frustration and void ab initio. The main difference between them is that frustration happen when without fault either party the contract cannot be perform. It was known to both parties after them making the contract but for void ab initio, the contract is void at the very beginning. It was known by the parties that agreement is deemed to be illegal and unlawful and both parties did not suppose to make contract out of it.

According to the case of Davis Contractors Ltd v Fareham UDC [2] :

“Frustration occurs whenever the law recognizes 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"

The changes of circumstances which make the contract legally or physically impossible to be perform. In order to set that contract is frustrate the case of J Lauritzen AS v Wijsmuller BV (The Super Servant Two) [3] had laid down five principles:

To lessen the strictness of common law

The frustration is not to be frivolously invoked and carelessly discharge the parties from any further liability.

It brings the contract to an end automatically

It must due to some extreme circumstances that made the contract to beomes impossible to be performed.

Lastly, it must be without either fault of the parties.

In our Malaysian position, frustration is in section 57(2) of Contract Act 1950. Under this act, there are two situations which render the contract to be frustrated; impossibility and unlawfulness.

The instances under the impossibility such as damage to particular thing, damage of something essential, death or incapacity, unavailability, and failure of particular source. The case of Taylor v Caldwell [4] showed the situation where the place i.e. the hall for the performance was destroyed six days before the concert. The court held that it was frustrated due to the damage of particular thing that it made impossible for the parties to perform the contract. Another instance, as in the case of Howell v Coupland [5] it was the sale for potatoes. The defendant agreed to sell 200 tons of potatoes to be grown on a particular field. The crop failed so the defendant was able to deliver only 80 tons. If the specific goods were unavailable it would be impossible to be performed.

On the other hand, there are two position under the unlawfulness; trading with enemies and approval from authorities. If the contract falls under one of this position then it would make the contract impossible to be performed. For instance, in Fibrosa Spolka Akcyjna v Fairbairn Lawson Combe Barbour Ltd [6] the issue in this case was whether Fibrosa could recover the £1000 when the contract became frustrated due to trading with the enemy. The respondent is an English company; Fairbairn while the appellant was a company which is the Fibrosa. The contract was to sell machinery becomes void when the country been occupied by the enemies. The appellant had paid the respondent. At first the money was not returned. Fairbairn refused to return the money, claiming that it had already done considerable work on the machinery. However the court held that the appellants were able to recover the £1000 because the appellant did not get the machine.

Instances for the situation failure to get approval from the authorities can be seen in the case of Lee Seng Hock v Fatimah bte Zain [7] . The appellant is a registered proprietor of a piece of land. The respondent is act on behalf of the deceased. The appellant wanted to buy land which belongs to the deceased. Later, the government required the whole land. When the land had been taken by the government, the court held that; it made the agreement between the appellant and respondent ceased to be exists and performance becomes impossible.

As a conclusion, frustration contract at first is a valid contract as object of the consideration is legal and lawful but due to some changes in circumstances it made the lawful contract becomes void. The necessary part is that the changes of circumstances are without fault of either party As in Standard Chartered Bank v Kuala Lumpur Landmark Sdn Bhd [8] 

“The frustration should be caused by some supervening event 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 obligation"