Frustration of Contract a brief explanation.

S. Egalahewa, b.a, llb, m. a, fipm


Lecturer and Examiner in Industrial Law-Sri Lanka Law College

1. Termination of Employment

1.1 A contract of employment may come to an end in a variety of ways and circumstances. For instance, it may be terminated on the death of either party or by effluxion of time or by mutual consent or by operation of law or by an act on the part of either party other than by an express termination of the contract by such party.

1.2. Termination in general can also be grouped as follows:-

(a) Termination by the employer on disciplinary grounds and constructive dismissal

(b) Termination by the employer on non-disciplinary grounds, (eg. Retrenchment and lay off)

(c) Termination by operation of law or by frustration of contract and impossibility of performance

(d) Termination by effluxion of time (e.g. Fixed-term contract)

(e) Termination by the employee (e.g. Resignation, vacation of post or abandonment of employment or repudiation of contract)1

2. Scope of the present discussion

2.1. The present discussion is limited only to frustration of contract caused by operation of law and supervening impossibility of performance.

3. What is frustration of contract?

3.1. One method by which a contract may come to an end without the necessity for either party to terminate in circumstances when the law will consider the contract to have terminated by frustration or due to impossibility of performance. Frustration of contract occurs when the law makes it incapable of being performed and when both parties are innocent in relation to the frustrating event. For instance if an employee becomes too ill to be able to perform his duties, the contract of employment is frustrated.

3.2. Frustration is the consequential result of a supervening impossibility of performance by way of operation of law or physical destruction of the subject matter (e.g. force majeure)

3.3. Under the doctrine of frustration a contract may be discharged if after the formation, events occur making its performance illegal, impossible or commercially sterile. Frustration is a doctrine reserved for impossibility of performance for which either contracting party is in any way was responsible.

3.4 The doctrine of frustration is subject to the qualification that the frustrating event is not self- induced. Thus imprisonment for a criminal offence is not

frustration since it is caused by the employee concerned. A party cannot rely on self-induced frustration, that is, frustration due to his own conduct or to the conduct of those for whom he is responsible. Frustration does not protect a party whose own breach of contract is actually the frustration event.

3.5. A contract may be discharged on the ground of frustration when something occurs after the formation of the contract which renders it physically or commercially impossible to fulfill the contract or transform the obligations to perform into radically different obligation from that undertaken at the moment of entry into the contract.

4. Concept of frustration under English Law and

Roman Dutch Law (RDL)

4.1. Frustration is a concept peculiar to English Contract Law and strictly alien to Roman Dutch Law. Our employment law is based on RDL. Although the concept of frustration is alien to RDL the doctrine that a contract was discharged by supervening impossibility was well recognized by Roman Law and RDL.

4.2. There are fundamental differences in approach under English Law and RDL. Basis of Contract of Employment in Sri Lanka is RDL. Although the concept of frustration is alien to RDL if a party desirous of terminating a contract on that ground
can do so by specifically terminating the contract
Weeramantry, however, states that these
differences, though of great importance in earl)
stage of legal development, have lost much of the
significance today2 According to S.R. de Silva, our
law does not recognize frustration of a contract of
employment and that impossibility of performance
does not automatically determine a contract but
only entitles1 Another author puts it in this manner
“The RDL does not recognize involuntary
frustration of the contract but acknowledges that
the supervening circumstances may make it
impossible for the contract to be performed, in
which event either party could take steps to revoke
or repudiate the contract.4

5. Instances of Supervening Impossibility 5. (i) Supervening Illegality –

Supervening illegality may arise in various ways, such as by legislation (by operation of law) or by new facts causing a clash with public policy

(ii) Physical impossibility –

When a subject matter of the contract is destroyed, the performance of the contract is rendered physically impossible and the contract is deemed, to be frustrated. An example is the destruction of the factory or the business place or the work-place without the fault of either party (e.g. tsunami destruction). For this purpose it is not necessary that there should be a total destruction of the subject matter of the contract. It is sufficient, if the subject

mater is affected in such a way that the main purpose of the contract is defeated or cannot be performed.

(iii) When the parties expressly provide –

The parties are at liberty to make express provision in the contract for allocating the risk of unforeseen events.

(iv) When the event was foreseen or should have foreseen by the parties –

When one party and not the other, foresees the event which is said to have frustrated the contract that party is not entitled to plead frustration.

(v) Self-induced Frustration –

When an impossibility or frustrating event is caused by the willful act or default of one of the parties, such impossibility or frustration will not discharge the obligations.

6. Personal Contracts such as Contract of Employment

6.1 Now that we have discussed the general principles involved in the doctrine of Supervening Impossibility of Performance or Frustration of Contract we may now see how it affects a Personal Contract or a Contract of Employment and how this doctrine applies to such Contracts.

(i) Death –

All contracts for personal services which can be performed only during the life time of the party contracting

we subject to the implied condition that he shall live to

perform them, and should he die, his executor is not liable to an action for the breach of contract occasioned by his death.5 In Graves Vs. Cohen the Court considered the effect upon a jockey’s contract for personal services of the death of his employer, a race horse owner. The Court held that his death frustrated his jockey’s contract with him, since the contract created a relationship involving mutual confidence.6 (Substitution of parties in pending cases is a different principle and should not be confused with this concept) – 7

(ii) Illness or Incapacity –

The question whether a contract of employment has been frustrated by the employee’s prolonged illness or incapacity depends on whether it was of such a nature or likely to continue for such a period, that further performance of his contractual duties would be either impossible or radically different from that envisaged by the contract. In applying this test a tribunal or court will treat as relevant factors, the terms of the contract, the nature and expected duration of employment, the period of employment and the prospect of recovery. Thus persistent illness may frustrate a contract of employment

(iii) Imprisonment –

A sentence of imprisonment upon an employee will frustrate his contract of employment as from the date of the sentence. Committing to remand jail may also frustrate a contract, depending on the jail period. A short period may not frustrate a contract. In South African case Berett Vs. Rhodesian Railway Ltd 8 the Plaintiff who was employed by the Defendant on Ist June 1907 was on 10″‘

June 1940 interned because he was an Italian subject. Plaintiff communicated with the defendant with regard to his position and was informed that in view of the internment his employment had automatically terminated and he was not entitled to pension as he was not qualified for it. The Plaintiff was released on 4th February 1941. It was held that the contract of employment is not automatically terminated by the temporary inability of the servant to fulfill his obligation there under but that it might be terminated by the employer if inability persists. Therefore the contract was not terminated by operation of law on the plaintiff’s internment, nor by continued internment.9

(iv) Changes affecting employment- (Supervening illegality) –

Contract of Service may also be frustrated by a subsequent change in the law. In Reilly Vs R.10 the appellant was appointed a member of a Statutory Board in Canada with a specific term of appointment and salary. During the tenure of the appointment the office was abolished by the repeal of statute establishing the Board. By a Petition of Right the appellant claimed damages for breach of contract, but the court held that the contract was discharged because further performance had become impossible by statute.

(v) Physical destruction of the subject matter –

Physical destruction of a factory or any other workplace may frustrate a contract of employment depending on circumstances such as, duration taken to reconstruct the place, whether makeshift arrangement could be made in continuing the business, whether the destruction is due to any willful or negligent act of the parties or whether the destruction is self-induced etc.

7. Is a Workman Entitled any Compensation for Termination of Service/ Loss of Employment due to Frustration of Contract?

(i) It is clear that the employer is discharged of his liabilities arising out of the contract when the contract becomes frustrated due to a supervening impossibility of performing obligation of the contract for no fault of the employer. In such situations specific performance of the contract or reinstatement in employment does not arise. But is the workman entitled to any compensation? The impossibility, takes place from the date of the frustrating event. Is he not entitled to any compensation for loss of employment per se or for his, long service (if any), rendered to the employer prior to the frustrating event? This) question has been discussed by Justice F.N.D. Jayasuriya when he was presiding over the Provincial High Court of the Western Province sitting in Colombo in D.H. Netticumara Vs. E. Motteu.11

(ii) The facts of the above case are that the several workmen who were employed by the employer in nil business concern called Salaka Recreation Club (A Casino Club) lost their employment subsequent to closure of the business due to operations of law. When the workmen turned up for work on 16.06.91 the Casino club was closed and they were directed to go back to their homes as the further running of the casino had been made illegal by!

Emergency Regulations and that the workmen were not permitted to work at their customary work place. Seven workmen made applications to the Labour Tribunal under Sec. 31 B(l)ofthe Industrial Disputes Act for relief. The employer in his answer admitted employing the workmen in the business of running a casino business entitled “Salaka Recreation Club” but denied termination of services and specifically pleaded that the Emergency (Games and Chance) regulations No. 1 of 1991 published in the Gazette Extra Ordinary No. 665/13 dated 06.06.1991 in the proprietary business of casino was compulsorily closed by an act of the state and the performance of the contract became impossible and the contracts of employment came to an end without any fault or lapse attributable to the Employer. He further pleaded that the applicants were employed in the running of an illegal business and therefore the applicants are not entitled to any relief. The Learned Counsel appearing for the Employer at the Labour Tribunal Inquiry as well as at the Appeal Inquiry argued that as the business in which the applicants were employed had to be closed down as a result of state prohibition of the business due to operation of law or due to supervening impossibility of performing the contract, that no legal responsibility attaches to the employer. The Learned President of the Labour Tribunal held that there was termination of services the applicants, but the termination was justified and lawful as the termination was for a valid reason. Court, considering the pleadings and submissions of the counsel for the employer where it was pleaded that termination for a valid reason in view of the frustrating event and the fact that the employer directed the workmen to go back to their homes came to a conclusion that there was a termination by the employer enabling the applicants to find

their way to the Labour Tribunal. Justice Jayasuria concluded that the applicants had established their eligibility to pass through the “gateway for relief before the Labour Tribunal” (vide – United Engineering Workers Union Vs. Devanaayagam.)12 Under sec. 31B there should exist a termination by the employer for the workmen to seek relief from the Labour Tribunal the Labour Trimbunal awarded compensation of three months’ wages to each applicant not as compensation for wrongful termination of services but as a gratuity and remuneration for pad meritorious and devoted service and leave pay in respect of earlier service. (The court thought this compensation was ‘meager’) This order was challenged in appeal.

(iii) Justice K N.D. Jayasuriya hearing the appeal confirmed the order of the Learned President inter alia on the following reasoning:-

(a) The current legal decisions pronounced by the Supreme Court establish that relief could be granted by a Labour Tribunal even where the termination of service was both lawful and justified. The court cites several cases where compensation was granted even when the termination was found to be lawful and justifiable. In Shell Company of Ceylon Ltd Vs. Pathirana 13 Justice Abeysundara pronounced that “There is no limit imposed by the legislature in regard to the power to grant relief under Section 31B that would prevent the grant of relief where the termination of service is both lawful and justified.” Justice Weeramantry in Kanagasabi Vs. Aitken Spence & Co. Ltd. 14 observed that “Relief available from a tribunal would not appear to be restricted to those which are available at law.” Again in Highland Tea Company

of Ceylon V. National Union of Workmen, Justice Alles

emphasized “This compensation must not be considered as recompense for unlawful termination of services. The payment is more in the nature of some kind of recompense for past service in the spirit of Labour practice prevailing today.” The same judge in Ceylon Workers’ Congress Vs. The Supdt of Rosbury Estate 15 clearly explained that a Labour tribunal President has jurisdiction to grant relief to a workman even though his services had been lawfully and justifiably terminated. There is a series of cases supporting this view 16 There are also a few cases where relief was not granted when the termination was found to be lawful and justifiable 17 but these cases can easily be distinguished.

(b) Another argument put forward by the Employer was that as the workmen were employed in an illegal business they are not entitled to any relief. In the present case the- business became illegal only after the Gazette Notification published on 06.06.1991. Therefore the employment before that date was not illegal and compensation was paid for past service rendered by the workmen when the business was not supposed to be illegal. The decision in Perera Vs. Dharmadasa 18 was distinguished. (Workman employed as a “Betting Clerk” in an illegal business of Horse Racing) The High Court was inclined to follow the view of Justice Gratiaen in Amarasekara Vs. Abeygoonawardena 19 (a Rent and Ejectment case) where it was held that when a tenant had to make an illegal payment of premium (key money) the parties were held not ” in part delicto “)

8. Concfusion ~ What are the legal consequence following from a Frustration of a Contract of Employment?

8.1. Under Common Law mere is no remedy as the contract is presumed to be discharged by frustration Therefore the question of damages does not

8.2. Labour Tribunals are not granting damages. are required “to make such order as may appear to the tribunal to be just and equitable.”.Therefore even in the event of a frustration of contract due to supervening impossibility or by operation of law a tribunal may grant relief in appropriate case.

8.3. According to Section 31B (l) (a)there should be a termination by the employer for a workman to the ‘gate-way’ for relief. Termination by employer may occur in cases of prolonge imprisonment and certain instances of char affecting employment. There could be termination by the employer in all cast frustration (e.g. destruction of the work supervening impossibility by operation of law, If RDL principles are to be applied, it is opt argument that as RDL does not presume, like in English law, an implied term of terminating a contract on frustration of contract, there should always be a termination by the employer (or by the

the workman) to end the contract. This question however, is not discussed in Salaka Recreation Club case. The court went on the presumption there had been a termination by the employer based on two grounds namely (a) that the employer had

admitted termination in his answer

and (b) that the termination was admitted in the submissions made at the inquiry before the Tribunal.

What is the position if this admission (made inadvertently or presumably unintentionally) was not there? Then the workmen could not have legally made applications to the Labour Tribunal. A Labour tribunal can grant relief only on an application validly made. It is unfortunate that this question had not been dealt with in this case.

The conclusion that one may come to on the basis of decided cases is that if a workman can find his way to the Labour Tribunal, it is open to the Tribunal to make an order under section 31C not withstanding the fact that there was a frustration of contract.

It may be useful to discuss the case Hettiarachchi Industries (Pvt) Ltd. Vs. Daya Kanthi 20 also in this matter. According to facts of this case the entire workforce staged a work stoppage and a protest and the employer terminated the entire workforce for wrongful refusal to perform duties and unlawfully preventing the management from running the affairs of the company. The day after the letters of termination were posted, the business premises at which the workmen had been employed was completely burnt down. At the time the letter of termination had been served on the applicant

she was on maternity leave but she too received the standard letter of termination sent to other employees. In response to a request made by the Applicant for employment after expiry of her maternity leave, the employer in their reply while reiterating allegation of misconduct referred to in the termination letter added that the workplace was completely burnt and as a result the applicant’s contract had got frustrated. The employer, however, offered to pay a sum of money calculated on the basis of half month’s salary for each year of service as ‘full and final” payment of statutory or other dues. Applicant was not satisfied and made application to the Labour Tribunal for relief and was granted a considerably enhanced sum as compensation. Employer appealed against this order and the High Court dismissed the appeal. When employer appealed to the Supreme Court the Court granted leave on the following issues:-

(a) Did the respondent’s employment come to an end by frustration/ impossibility of performance due to the destruction of the place of her work? If so does the Labour Tribunal has any jurisdiction to grant any relief?

(b) Where a contract of employment comes to an end by frustration, is there an obligation on the part of the employer to obtain any permission of the Commissioner of Labour under the Termination of Employment of Workmen Act No. 45 of 1971?

(c) Does the fact that the employer has not been liquidated result in the non applicability of

the doctrine of frustration, where the place of employment is destroyed?

(d) In the circumstances of this case, was the Labour Tribunal and the High Court under a duty to make an order which was just and equitable not only by the workmen, but also by the employer?

8.7. The Supreme Court in its final judgment observed that “Assuming that the destruction of the place of the respondent’s work might have brought an end of the contract of employment by the operation of law relating to frustration of contract, there must have been a contract of employment to be frustrated at the relevant time. The respondent’s services had been terminated for alleged misconduct before the fire took place.

8.8. Although her workplace had been burnt down the termination on account of alleged misconduct was reiterated after the date of the fire.

8.9. As far as the Respondent (workman) was concerned, she was not in any way to be blamed for the reasons adduced by the appellant for the termination of the appellant’s employees enmasse.

8.10. Justice Amarasinghe delivering the judgment added “I am in agreement with the view expressed by the leaned counsel for the appellant that an equitable order should take the employer and employee into account. In the circumstances of this case, I find no reason to hold that the award

made by the Labour tribunal was inequitable.

The fact that the workplace was burnt down does not per se relieve the employer of his obligations to his employees.

9. It is settled law that the Contract of Employment is governed by Common Law as amended by statue law. The question of applicability of RDL principles in cases of frustration of contract has not been adequately dealt with in our case law. A contract may simply collapse by frustration or by supervening impossibility according to English law ( if no provision to the contrary has been provided in the contract) in which situation a termination by either party does not arise. But in the case of RDL there should be a termination or repudiation by one of the parties. If the employer does not terminate the contract subsequent to frustration the resulting position is that Section 31B (1) (a) bars the workman to make an application to the Labour Tribunal. Can he take up constructive termination in situations where the employer failing to terminate the contract on frustration? These are some moot points to be settled. It is up to the Labour Tribunals to open

Foot Notes

1. Contract of Employment – S. R. de Silva

2. The Law of Contract – C. G. Weeramantry – Vol I Page 746

3. Some Aspects of Labour Law – S. R. de Silva -Page 141

4 Hand Book on Labour Relations – 1997 –

Publication of Friedrick Ebert Stiftung- Colombo – Page 54

5, Hall Vs. Wright (1858) EB & E 746-793

6. (1970) 46 TLR 121

7 See Article titled “Substitution of Parties in Labour Tribunal Proceeding” by the same writer published in “Labour Tribunal Journal” – Volume I Part 3-Page 72

8. (1947)(2)SALR1075

9. (1947) AC 696

10. (1934) AC 176

11. HCLT/ Appeal No. 278/92 (LT Application No. 1/ 285/92-decided on 26.01.1994

12. 69 NLR 289 at 299

13. 64 NLR 71

14. SC 125/67 (Ceylon Labour Gazette 1969-Page 244)

15. 70NLR211 at213

16. Abeysekera Vs. Wijesena – SC 113/71-SCM 10.10.73, Ceylon Cold Stores Vs. Industrial and General Workers’ Union – 1 Srisk. LR 71, Brown & Company Ltd. Vs. Ratnayake – (1986) 1 BALR 229, Hilman’s case (1977) 79-1 NLR 421, Somawathie Vs. Backson Textile” Industries Ltd.-(1973) 79 NLR 204,Saleem Vs Hatton National Bank [1994] 3 Sri LR 409.

17- Watareka M.P. Co-operative Society Vs. Wickrammachandra – SC 113/71 -SCM 27.08,73

18. (1978-79) 2 NLR 287

19. 56 NLR 57

20. [1998] 3 Sri LR 337