What is Frustration of Contract?

An employment contract may come to an end by operation of law. One of the ways is called frustration.

The doctrine of frustration holds that where the occurrence of an event or the alteration of a circumstances renders a contract fundamentally in character from what the parties originally intended, the contract may be terminated without liability. Frustration of contract therefore simply means the termination of a contract in circumstances where, for unexpected reasons, it is no longer possible for the parties to perform their obligations under the contract, without fault on either side.

In MHS Aviation Sdn Bhd v. Zainol Akmar Mohd Noor [2001] 2 MELR 133, the Industrial Court quoted Harvey’s “Industrial Relations and Employment” (Butterworth series) about the frustration of an employment contract:

“One instance of termination by operation of law is the doctrine of frustration: where, without the fault of either party, some supervening event occurs which was not reasonably foreseeable at the time when the contract was made and which renders further performance of the contract either totally impossible or something radically different from what the parties bargained for, then the contract is forthwith discharged by operation of law.”

When does Frustration Apply?

Frustration will only apply where the event or circumstance was unforeseeable and where it occurred through no fault of either party. It is a fact-specific determination that will be made on a case-by-case basis.

Circumstances where a contract of service may be frustrated are:

• Death of the employee

• Permanent injury rendering the employee unable to work

• Prolonged illness

• Long-term imprisonment

• Revocation of a professional licence required for the job

• Change in the law

• War

For the doctrine of frustration to apply, two important ingredients must be present. The case of The Hannah Blumenthal [1933] 1 ALL ER 34 laid down the following principles:

1. There must be some event capable of rendering the performance of the contract impossible or radically different from that which the parties contemplated; and

2. That the event itself must occur without fault or default of either party.

The Industrial Court in Ramanazan Kathmuthu v. Southern Latex Products Sdn Bhd [2016] 2 MELR 406 referred to Spencer v. Paragon Wallpapers Ltd [1976] IRLR 373, where the English Court opined that prior to determining whether a contract of employment is frustrated, there must first be:

"A discussion so that the situation can be weighed up, bearing in mind the employer's need for the work to be done and the employee's need for time in which to recover his health".

Employers should request panel doctors or medical experts to give their opinion on the nature and severity of the illness or injury and the duration of the recovery period of the same. The greater the degree of illness or incapacity and the longer a period of time over which it has persisted or is expected to persist, the more likely an employment contract has been frustrated. A permanent disability resulting in the inability of an employee to return to work will frustrate a contract.

Is the Employer Legally-Obligated to Provide Light Duties?

The Industrial Court is generally of the view that if an employee is incapacitated by ill health and is no longer able to perform the job he was employed to do, the employer should consider whether or not the employer could be kept in employment in another capacity.

If there is an existing job, even if it is lower paid, the employer should offer alternative employment to the employee. If the employee refuses any such offers, then it seems to be reasonable for the employer to dismiss the employee. The employer is only required to consider the employee’s ability to perform existing jobs.

There is no legally binding obligation on the employer to create a new job in order for the employee to continue working.

Are Termination Benefits Payable in Cases of Frustration?

The employee whose contract is frustrated would be entitled to be paid termination benefits under the Regulation 4 of the Employment (Termination And Lay-Off Benefits) Regulation 1980 and all statutory benefits due to him under the relevant legislation.

If the employee elects to resign voluntarily and apply for compensation such as invalidity pension scheme under SOCSO, then the employer need not pay termination benefits.

In Amsor Tuah v Akademi Binaan Malaysia (Wilayah Sabah) [2018] 3 MELR 1, the claimant's prolonged absence from work had resulted in his contract of employment to be frustrated. Alternatively, it could be inferred under S.15(2) Employment Act 1955 that by the claimant's long absence without leave, he had abandoned his service with the company.

It was shown in evidence that the company had issued numerous letters and reminders inquiring why the claimant has been absent from work without any application for leave or permission. In this case, termination benefits will not be payable. 

Can an Employee Make a Claim for Unfair Dismissal if his Contract is Frustrated?

The employee may not. In the fresh-off-the-Industrial-Court-oven case of Raj a/l Joseph Appadorai v Linde Malaysia Sdn Bhd (Award No. 873 of 2019), the Industrial Court cited the case of Pauline Peck V. Saratim Insurance Agency Services Sdn Bhd [2010] 3 ILR 630 (Award No. 901 of 2010) where it was held:

“By frustration, it means that there has been such a change of circumstances that events make it physically impossible for a contract to how performed as for example, where the illness of the employee lasts or is likely to last for a prolonged period. It cannot be disputed that illness or incapacity which is permanent will frustrate the contract, and so will illness which is of so prolonged a nature to prevent the employer from getting substantially what he has bargained for as it is also accepted that an employee must provide satisfactory performance of the work which he has contracted to do. ( Kumpulan Guthrie Sdn Bhd v K.P. Sukumari Amana Narayanan Meon, Award No. 33 of 1973)

...The employers cannot be expected to go to unreasonable lengths in seeking to accommodate someone who is not able to carry out his job to the full extent ( Garricks (Caterers) Ltd v. Nolan [1980] 1 IRLR 259).

About the Author

Tahirah Manesah Abu Bakar is a Human Resources expert with 22 years of experience in Human Resources and corporate legal work. She also holds a MSc in Management (by Research) specialising in constructive dismissal.

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