Question

In January 2012, The Federal Land Consolidation and Rehabilitation Authority (the FLCR
Authority) invited twenty persons from Kampung Tebing Runtuh to participate in a project to
develop an oil palm plantation known as Gama Tebing Runtuh in Johor (‘Tebing Runtuh
Scheme’). At the when the invitation was made, the land allocated for the Tebing Runtuh
Scheme was state land. These twenty people accepted the invitation and the FLCR Authority
submitted their names to the State Authority of Johor. The State Authority of Johor approved
the FLCR Authority’s application for the twenty people to become participants in the Tebing
Runtuh Scheme and also the FLCR Authority’s application that each participant be allotted a
share equivalent to 6 acres per participant in the Tebing Runtuh Scheme.

In April 2013, the Malaysian Parliament passed an Act known as the Land Rehabilitation Act
2013 that came into force on 1 August 2013. Pursuant to this Act, all property, rights and
liabilities of the Federal Land Consolidation and Rehabilitation Authority were transferred to
Falcon Berhad (Falcon). All participants of Tebing Runtuh scheme individually signed their
respective agreements with Falcon on 1 September 2013 under which Falcon provided them
with houses. Some of them worked for Falcon in harvesting the oil palm. Others did not. For
those who worked for Falcon, the latter paid them for the works that they carried out. Falcon
also agreed to register them as participants in the register of holdings, each participant
holding one share, such share being equivalent to six acres of land.

In February 2014, the State Government of Johor decided to reclaim possession of all the
land under the Tebing Runtuh Scheme from Falcon. This decision was affected in June 2014.
As a consequence, the Tebing Runtuh Scheme came to an end. The reason for such decision
was that the State Government of Johor needed the land for a project known as Projek Laluan
Ketiga Malaysia-Singapura (‘the Malaysia-Singapore Second Link Project’).

Falcon informed the participants of the State Government of Johor’s decision to recover
possession of the land in the Tebing Runtuh Scheme. They were told that, as a consequence,
Falcon could no longer proceed with the agreement and the participants had to leave the
Tebing Runtuh Scheme area

Advise the participants of the Tebing Runtuh Scheme.

Answer

The issue is whether the discharge of contract between Tebing Runtuh Schemers and
Falcon Berhad project of Gama Tebing Runtuh falls under the doctrine of discharge by
frustration?

A contract that is discharged by frustration occurred after the formation of a contract, a

change of circumstances happened that makes it impossible for the parties to physically or
legally perform the contract, thus making the contract incomplete. Examples of the
circumstances are when the subject matter of the contract was destroyed like a factory that
was burnt down and when there was a new law that forbid the contract to be continued. The
effect of this discharge is the contract becomes void and the parties are discharged from the
further performance of the contract.

In Malaysia, the doctrine of frustration is laid down in Section 57(2) of the Contracts Act
1950 where it was stated that 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. This section had
pointed out 2 limbs which the first one is when the act becomes impossible after the contract
was made and secondly, by reason of some event which the promisor could not prevent.

The landmark case for frustration is Davis Contractor ltd v Fareham UDC where the
parties had entered into a contract, agreeing that plaintiff to build 78 houses for Fareham
Council within 8 months for an agreed price of 85,000 pounds. Due to a shortage in skilled
labour and material the contract took 22 months to complete and was much more expensive
than anticipated. The plaintiff were paid the contractually agreed price but bought an action
arguing for more money based on the fact that the contract had become frustrated and
therefore they were entitled to further payment based on a quantum meruit basis. The court
held that the contract was not frustrated. This is because the contract could still be continued
and not impossible to be carried on. Although the performance is rendered to be more
difficult, more expensive or delayed, it is still not frustrated as it can be continued although it
takes a longer period of time.

In the case of Guan Aik Moh Sdn Bhd v Selangor Properties Bhd, Gopal Sri Ram JCA
had laid down three elements of the doctrine of frustration. The first one is the event upon
which the promisor relies as having frustrated the contract must have been one for which no
provision had been made in the contract. Secondly, the event relied upon by the promisor
must be one which he is not responsible. And lastly, the event which is said to discharge the
promise must be such that renders it radically different unjust to enforce the original promise.

There are 5 circumstances on where a contract can be frustrated and also 3 extra
circumstances for it, namely, destruction of subject matter, non-occurrence of a particular
event, death, illegality, outbreak of war, inability of promisor to obtain a licence, statutory
prohibition and lastly, seizure or compulsory acquisition by the government. In this situation,
the circumstances that is suitable for it is seizure or compulsory acquisition by the
government. This involves where the object of the contract was being seizure by the
government and both parties have no control upon it.

This can be illustrated in the case of Lee Seng Hock v Fatimah Bte Zain. In this case, 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 the agreement made between the appellant and respondent ceased to be exists
and performance becomes impossible.

In this present case, the contract made between the Tebing Runtuh Schemers and Falcon
Berhad is impossible to perform because according to Section 57(2) of the Contract Acts
1950, the contract will become impossible when there is some event which the promisor
could not prevent it from happening that cause the contract to be void. The land that Falcon
Berhad should have authority was reclaimed possession by the State Government of Johor
and Falcon Berhad had no power to prevent this from happening.

Contrast to the case of Davis Contractor Ltd, this present case was impossible to perform
as the said land was no longer available when the State Government of Johor reclaimed the
land. The principle that can be derived from the case was that a contract is said to be
frustrated when there is no possible way for it to be continued or performed. Thus, applying it
to this present case, the contract is impossible to perform as the land is not available.

According to the case of Guan Aik Moh Sdn Bhd v Selangor Properties Berhad, the first
element to prove that the contract is frustrated is that there is no provision in the contract
stating that the event may happen. In this present case, there is no provisions stated in the
contract that State Government of Johor will reclaim possession of the land involved. Thus,
the first element was fulfilled.

The second element is the event relied upon the promisor which he is not responsible for.
This is to say that the event happened was not occurred or responsible by the promisor. In this
present situation, the event happened was not in Falcon Berhad’s fault. Applying the case of
Davis Contractor, the event that caused the contract to be delayed was on the defendant’s
own fault and he was responsible for it, thus the contract was held to be not frustrated.
Contradicting to this present situation, the promisor had no responsibilities to what had
happened to the land. Hence, the second element was also fulfilled.

The last element is the event which discharge the contract must be such that renders
radically different unjust to enforce the original promise. In this case, the event happened had
caused a radically different situation towards the parties. There was no land that was
available for them to continue the contract, hence making it radically different from what had
agreed upon. The contract was unable to perform as no land was available for the contract to
be continued. Thus, the last element was also fulfilled.
 This situation falls under the circumstances of seizure by the government where the case
of Lee Seng Hock v Faridah Bte Mat Zain is applied. The land that was reclaimed by State
Government Johor had prevented the contract to be performed. The land was reclaimed by
the government itself and hence, applying it to this case, the contract is frustrated.

There are remedies for the defendants if the contract was to be held frustrated or void by
the court. According to Section 66 of the Contract Act 1950, 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. Also, according to Section 15(2) and (3) of the
Civil Law Act 1956, where a contract has become impossible of performance or been
otherwise frustrated, the person who had received benefit from the other parties must recover
or pay back the person whom he received the benefit from with the same amount he had
received from him.

In conclusion, the contract between Tebing Runtuh Schemers and Falcon Berhad was
frustrated when the State Government of Johor reclaimed possession of the land and Tebing
Runtuh Schemers can claim for remedies from Falcon Berhad.