Gulam v Yusuf (Civil Appeal No. 21 of 1945) [1946] EACA 6 (1 January 1946)

Full Case Text

## COURT OF APPEAL FOR EASTERN AFRICA

Béfore Sir Joseph Sheridan, C. J. (Kenya), Sir Norman Whitley, C. J. (Uganda), and SIR G. GRAHAM PAUL, C. J. (Tanganyika)

## ALIBHAI GULAM, *Appellant* (Original Respondent-Defendant) v.

## MOHAMED YUSUF (trading as NAIROBI MEAT SUPPLY CO.) Respondent (Original Appellant-Plaintiff)

Civil Appeal No. 21 of 1945

(Appeal from decision of H. M. Supreme Court of Kenya)

Breach of contract—Frustration—Damages.

On 7th November, 1940, Alibhai Gulam agreed to lease to Mohamed Yusuf three shops for a term of 11 months from 1st January, 1941, at the monthly<br>rental of Sh. 290. Alibhai Gulam knew that Mohamed Yusuf had two shops one of which being in the Municipal Market and he was aware of Mohamed Yusuf's intention of transferring his business from the Municipal Market to one of the three shops and to sub-let the two others for Sh. 194 per month to a third party. Mohamed Yusuf was paying Sh. 237/50 per month for his shop in the Municipal Market. $\cdots$

Alibhai Gulam failed to put Mohamed Yusuf in possession of the shops. On 10th June, 1941, the provisions of the Increase of Rent and Mortgage Interest (Restrictions) Ordinance, 1940, were applied to the premises in question with effect from 1st January, 1941. In October, 1941, Mohamed Yusuf instituted proceedings against Alibhai Gulam for damages for breach of contract—the damages being the savings on rent for 11 months—and Alibhai Gulam sought to excuse his non-performance of the agreement on the ground that it had become impossible of fulfilment owing to the enactment of 10th June, 1941.

Held (5-3-46).—(1) The doctrine of frustration does not apply where it is a breach of the contract and not an external supervening event for which neither of the parties is responsible which renders its performance impossible.

(2) The damages claimed were the direct result of the breach of contract and were not too remote.

(3) (Per Graham Paul, C. J.). Observations on the question of mitigation of damages. Cases referred to: Fibrosa v. Fairbairns Lawson Combe Barbour Ltd. (1942) 1 A. E. L. R. 122; Hirji Mulji v. Cheong Yue Steamship Co. (1926) A. C. 497; Simpson v.<br>L. N. W. Rly. Co. 1 Q. B. D. 274; Hadley v. Baxendale 23 L. J. Exch. 179; Roper v. Johnson 28 L. T. R. 296; Michael v. Hart 1902 1 K. B. 482.

Khanna for the appellant.

## Madan for the respondent.

SIR JOSEPH SHERIDAN, C. J.—Considerable time was taken up with the question of the doctrine of frustration in this appeal, a question which in my view of the facts of the case has no application. In the case of Fibrosa $v$ . Fairbairns Lawson Combe Barbour, Ltd. (1942), 1 A. E. L. R. 122, Viscount Simon, L. C., at p. 125 in referring to frustration said: "The principle is that where supervening events not due to the default of either party render the performance of a contract indefinitely impossible, and there is no undertaking to be bound in any event, frustration ensues", and at p. 134 Lord McMillan says: "My Lords, every system of law has had to face the problem of defining the consequences of a contract becoming impossible of fulfilment owing to some external supervening event for which neither of the parties is responsible. That such an eventuality releases both parties from further performance of any of the stipulations of the contract is agreed on all hands. Each must fulfil his contractual obligations up to the moment when impossibility supervenes, for the contract is not avoided by becoming impossible of fulfilment but the duty of further performance ceases." In the present case it was not the case of supervening events not due to the default of either party that rendered the performance of the contract impossible. Long before 10th June, 1941, the date of the frustrating legislation, the appellant had broken his contract and for that breach he is liable in damages, and in my opinion the retrospective character of the legislation cannot affect his liability. It will be noted in Lord McMillan's dictum that "Each must fulfil his contractual obligations up to the moment when impossibility supervenes". In short, the appellant is endeavouring to excuse himself from liability for his breach of contract by invoking the doctrine of frustration. This he cannot be allowed to do.

The second question is what damages is the respondent entitled to. The learned Magistrate who tried the case and the learned Judge who heard the first appeal both found that a breach of contract had been committed, a finding with which I agree and which I understood not to be disputed. A sum of only Sh. 1 nominal damages was awarded on the ground that the specific damages of Sh. 1,500 claimed was held to be too remote to be recoverable. With that finding which involves a point of law 1 respectfully disagree. The learned Magistrate found "The defendant knew that the plaintiff had two butchers' shops and he was aware of plaintiff's intention to transfer his business from the Municipal Market to one of the shops in River Road and to sub-let for Sh. 194 per month the other two shops to one Mohamed Sodagar, who was at the time of the agreement the occupier of one of these shops. The plaintiff did not obtain possession of the shops in River Road and he claims from the defendant damages representing the difference in the rents of the stall in the Market and the shop he was to use over a period of 11 months, i.e. Sh. 237/50–96/- $\times$ 11 = 1,556/50. The claim was reduced to Sh. 1,500 for the purpose of giving this Court jurisdiction in the matter". Later in his judgment the learned Magistrate said: "There is not the slightest doubt that had the agreement been carried out the plaintiff would have paid less rent for the new shop, but there is nothing to show that in spite of such lower rent he would not have made less profit in the new shop than he was making in the stall in the Market. In my view for the purpose of calculating the damages to a business it is wrong to take one single item of expenditure such as rent but the whole business must be considered and it is purely a matter of speculation in this case whether the profits of the plaintiff's business would have been greater or less in the new premises than in the stall in the Market". In my opinion the question of profit or loss of the<br>business in the new premises in River Road was conjectural and should be disregarded in assessing the damages. There is no justification for speculating whether the plaintiff would have suffered profit or loss by reason of the change and no claim was made by him for loss of profit. He confined his claim to specific damages which the learned Magistrates clearly would have awarded him had he not taken into consideration the problematical question of profit and loss of the business. I have had the advantage of reading the judgment of my brother Graham Paul and I agree with what he says on the question of mitigation of damages. I would allow the cross appeal and substitute the sum of Sh. 1,500 for Sh. 1 damages and dismiss the appeal. The costs in this Court will follow the event and be restricted in accordance with the agreement of the parties dated the 20th December, 1945, the order for costs in the first appeal is set aside and an order giving the plaintiff-appellant (Mohamed Yusuf) the costs of the appeal substituted, the order for costs before the Magistrate will stand.

SIR NORMAN WHITLEY, C. J.—The material facts in this case are as follows. The defendant owns a plot in River Road, Nairobi, with three shops thereon. The plaintiff is a butcher with one stall in the Market and a shop in Stewart Street. Nairobi. He was desirous of moving his business from that market stall and on 7th November, 1940, entered into a written agreement with the defendant to rent these three shops from him as from 1st January, 1941, for eleven months at a monthly rent of Sh. 290, vacant possession to be given on the 1st January, 1941. The Magistrate found that the defendant knew that the plaintiff intended to use one of the three shops for his trade as a butcher and to sub-let the other two. The evidence in my opinion supports that finding. He would thereby have effected a substantial saving in rental as compared with what he was paying for the stall in the Market. At that time the Increase of Rent Restrictions Ordinance did not apply to business premises and the defendant gave the tenant of the three shops formal notice to quit. The tenant did not vacate and the defendant took no steps to eject him. From lawyers' letters exchanged in November 1940 it seems clear that the reason for the defendant taking no further steps with a view to giving the plaintiff possession in pursuance of the agreement was that he took up the stand that the tenancy agreement was subject to a formal lease being executed. The learned Magistrate who tried the case held this stand to be unwarranted and I think he was right in so holding. Then on the 7th June, 1941, a Government Proclamation was published bringing business premises under the protection of the Increase of Rent and Mortgage (Restrictions) Ordinance, 1940. In October 1941 the plaintiff brought this action for damages alleged to have been suffered by him by reason of the defendant's failure to give possession in pursuance of the agreement. The damages which he claimed were based on the extra rent which he had to pay for his stall in the market as compared with the net expenditure to which he would have been put for rental if he had been given vacant possession of the three shops. The defence to the claim has throughout been frustration the contention being that the Proclamation of the 7th June, 1941; was made retrospective so as to operate from the 1st January, 1941, so that the defendant was unable to claim possession from his former tenant.

The learned Magistrate rejected this defence and on first appeal the learned Judge of the Supreme Court upheld that view, I also feel no doubt that in the circumstances of this case the defendant is not entitled to avail himself of the defence of frustration.

The rule as to frustration is thus stated by Lord MacMillan in Fibrosa $v$ . Fairbairn (1942) 2 A. E. L. R. at page $134$ : —

"My Lords, every system of law has had to face the problem of defining the consequences of a contract becoming impossible of fulfilment owing to some external supervening event for which neither of the parties is responsible. That such an eventuality releases both parties from further performance of any of the stipulations of the contract is agreed on all hands. Each must fulfil his contractual obligations up to the moment when impossibility supervenes, for the contract is not avoided by becoming impossible of fulfilment, but the duty of further performance ceases."

One of the simplest examples of the operation of the frustration rule is to be found in the Hong Kong case of Hirji Mulji v. Cheong Yue Steamship Co. (1926) A. C. 497 which went to the Privy Council. There by a charter party made in November 1916, the respondents agreed to place their steamship at the disposal of the appellants at Singapore on 1st March, 1917, and the appellants agreed to employ her on specified terms for ten months from the date when she was delivered to them. The charter party contained a clause by which all disputes arising out of the contract were submitted to arbitration in Hong Kong. The ship

was requisitioned by the Government before 1st March, 1917, and was not released until February 1919. The appellants then refused to take delivery of her. An arbitrator awarded the respondents damages for breach of contract, and they brought an action upon the award. It was held that there had been in 1917 a frustration of the charter party which forthwith brought to an end the whole contract, including the submission to arbitration, and that consequently the contract being executory the arbitrator had not jurisdiction and that the legal effect of the frustration of a contract does not depend upon the intention of the parties, or their opinions or even knowledge, as to the event which has brought about the frustration, but upon its occurrence in such circumstances as to show it to be inconsistent with the further prosecution of the adventure. The position in the present case is totally different. When the defendant made his contract with the plaintiff in November 1940 agreeing to give vacant possession on 1st January, 1941, there was no impossibility of performance. The then tenants of the business premises had no statutory protection at that time and there was nothing to prevent the defendant from taking ejectment proceedings if the tenants refused to comply with the notice to quit and in my opinion it was his duty to take such proceedings in order to put himself into a position to carry out his contract with the plaintiff. When the time for performance came, 1st January, he still did nothing and although for a further five months the tenants could have had no defence to ejectment proceedings he took no action against them whatsoever. He was in default and liable for breach of his contract throughout that period and I can find nothing in the numerous authorities on frustration to which we have been referred which would lead me to think that the June Proclamation, even though made retrospective to the 1st January, can operate so as to cure a breach which had already occurred, attributable solely to the defendant's own laches and which had continued for five months. There is apparently no reported case of retrospective frustration and I should be surprised if there were since the essence of the frustration rule is that the contract should have become impossible of fulfilment owing to some external supervening event for which neither party is responsible and that each of the parties to the contract must fulfil his contractual obligations up to the moment when impossibility supervenes. If the defendant had done what he ought to have done, and could have done, in a genuine attempt to carry out his contract the question of impossibility of performance would never have arisen, since by the time the Proclamation was published the tenants would have been removed by process of law and the plaintiff would have been in possession. The possibility that ejectment proceedings might have dragged on until June has, in my opinion, no bearing upon the case. It is pure speculation, the position might have been different if the defendant had been able to show that he had done everything possible and was in breach through no fault of his own. I can see no merits in the appeal.

As regards the cross-appeal the learned Magistrate was in my opinion mistaken in rejecting the measure of damages put forward by the plaintiff. He found that there was not the slightest doubt that had the agreement been carried out the plaintiff would have saved in rental but felt that he could not treat that saving as the measure of damages because it was a matter for speculation whether the profits would have been greater or less in the new premises than in the stall in the market. As to how or whether his profits would vary there was no evidence, but it seems reasonable to assume that he was not anticipating a diminution in profits as a result of changing his place of business. Difficulty in assessing damages is no reason for awarding no damages at all, and the same observation applies even though, as must inevitably often be the case, damages are to some extent a matter of speculation (Simpson v. L. N. W. Ry. Co. 1 Q. B. D. 274). The difference in rental is in my opinion the proper measure of damages in this case.

I would accordingly dismiss the appeal and allow the cross-appeal and I agree with the order proposed by the learned President.

SIR G. GRAHAM PAUL, C. J.—The facts involved in this second appeal and cross-appeal are very simple and they have been very concisely stated by the learned Magistrate who tried the case, as follows:-

"In September 1940 the plaintiff being minded to close down his stall in the Municipal Market approached the defendant with a view to leasing the three shops in River Road and accordingly on 7th November, 1940, an agreement was prepared and signed by the parties in the presence of a witness whereby the defendant leased to the plaintiff the three shops abovementioned for a term of eleven months to begin on $1-1-41$ at the monthly rental of Sh. 290 (vide Ex. 2). I shall refer to the terms of the lease in greater detail later. The defendant knew that the plaintiff had two butchers' shops and he was aware of plaintiff's intention to transfer his business from the Municipal Market to one of the shops in River Road and to sub-let for Sh. 194 per month the other two shops to one Mohamed Sodegar who was at the time of the agreement the occupier of one of those shops. The plaintiff did not obtain possession of the shops in River Road and he claims from the defendant damages representing the difference in the rents of the stall in the market and the shop he was to use over a period of 11 months, i.e. (Sh. 237/50 - Sh. 96 $\times$ 11 = Sh. 1,556/50). The claim was reduced to Sh. 1,500 for the purpose of giving this Court jurisdiction in the matter."

Upon these simple facts we have had very lengthy argument from which only two important questions of law emerge.

The first point arises upon the strenuous attempt by Counsel for the appellant to bring in the doctrine of frustration. The frustration founded upon is the fact that on 10th June, 1941, the provisions of the Increase of Rent and of Mortgage Interest (Restrictions) Ordinance were for the first time applied to "business premises", the premises in question being of course business premises. Though this extension of the operation of the Ordinance only came into force on the 10th June, 1941, it was made retrospective to 1st January, 1941. It seems to me quite clear on a proper understanding of the doctrine of frustration and on an examination of the effect of the enactment of 10th June, 1941, that the doctrine of frustration has no application whatever to the facts of this case.

The Bible of the doctrine of frustration in English law is of course the wellknown Fibrosa case decided in the House of Lords in 1942 (1942 A. E. L. R. 122). One of the most succinct passages in the judgments of their Lordships in that case is the following from the speech of Lord MacMillan:

The first observation I have to make in applying that summary of the law to the facts of this case is that the enactment of 10th June, 1941, was not primarily or by itself the thing which it is alleged made the contract in this case impossible of performance. The enactment did not strike at the root of the contract at all, and on the facts of this case the enactment is the only "external supervening event for which neither of the parties is responsible". What did in this case make the contract impossible of performance, was not the enactment but the fact that when this enactment was made the premises in question, or part of them, were not in the occupation of the respondent but in the occupation of a third party. This was clearly due to the breach of contract by the appellant in not carrying out his unqualified obligation to put the respondent in possession on 1st January, 1941. That breach took place before 10th June, 1941, and but for that breach by the respondent the enactment would not have affected the contract or its performance at all. It follows that in attempting to bring in the doctrine of frustration as an answer to a claim of damages for this breach of contract the appellant is in fact founding upon his own breach of contract as frustration. To my mind that mere statement of the position is enough to show that the doctrine of frustration has no application here. In not one of the many decisions quoted to us by Counsel for appellant did it appear that the frustration founded upon was in any way due to the breach of the contract in question by the very party seeking to set up the doctrine of frustration. A breach of a contract by one of the parties to it cannot possibly be described as an "external supervening event for which neither of the parties is responsible".

So much for the attempt to drag in the doctrine of frustration, which in my view fails completely.

The second point of importance is the ruling—and it is a ruling in law—by the learned Magistrate that the damages claimed were too remote.

With respect I think that the learned magistrate erred in law in ruling as he did on this point. In regard to remoteness of damage the general law is very clearly stated in the judgment in the classic case of Hadley v. Baxendale (23 L. J. Exch. 179 at p. $182$ : -

"We think the proper rule in such a case as the present is this:—where two parties have made a contract which one of them has broken, the damages which the other party ought to receive in respect of such breach of contract should be such as may fairly and reasonably be considered either arising naturally, i.e. according to the usual course of things, from such breach of contract itself, or such as may reasonably be supposed to have been in the contemplation of both parties at the time they made the contract, as the probable result of the breach of it. Now if the special circumstances under which the contract was actually made were communicated by the plaintiffs to the defendant, and thus known to both parties, the damages resulting from the breach of such a contract which they would reasonably contemplate, would be the amount of injury which would ordinarily follow from a breach of contract under these special circumstances as known and communicated."

Now in this case the appellant knew the intentions of the respondent in entering into the contract, namely that he was to close down his place of business in the market and instead open in one of the shops the subject of the contract and that he was to sublet the other two shops. By his breach of contract the appellant prevented the respondent from carrying out these known intentions of the respondent. It seems to me manifest in these circumstances that the special damages suffered by the respondent in consequence of his being prevented from carrying out these known intentions must be supposed to have been contemplated by the parties to the contract and to be therefore recoverable.

The learned Magistrate in his ruling which I have quoted does not seem to differ from the view I have just expressed as to the intentions of the respondent having been in contemplation of the parties to the contract, but his decision is based on the following passage in his ruling:-

"but there is nothing to show that in spite of such lower rent he would not have made less profit in the new shop than he was making in the stall in the

Market. In my view for the purpose of calculating the damages to a business it is wrong to take one single item of expenditure such as rent but the whole business must be considered and it is purely a matter of speculation in this case whether the profits of the plaintiff's business would have been greater or less in the new premises than in the stall in the market. For that reason I agree with the defendant that the damages claimed are too remote. In the result there will be judgment for the plaintiff in the sum of Sh. 1 with costs."

In so ruling the learned Magistrate did not fully appreciate that there is no claim by the respondent for any loss of business profits due to the breach of contract. Such a claim would rightly have been dismissed as too remote. In his claim the respondent has rightly confined himself to the definitely ascertainable loss he has sustained as the direct result of the breach of contract. He is deprived by that breach of the saving of rent and of the rent from the sub-tenants, such deprivation being the direct and natural result of the breach of contract in the circumstances which were known to the appellant at the time of the contract.

Whether the respondent in the new shop would have made more or less profit than in the old shop is indeed a matter of speculation, and it is a speculation which was, and is, the concern only of the respondent and not of the appellant. In conducting his business the respondent had a perfect right to decide that he would by entering into this contract make a net saving in rent and it seems to me that he is entitled in the matter of damages to be put in the same position ad hoc as if the contract had been performed. Whether, as a result of the change of place of business, he would make or lose money in his business seems to me a question too remote from the contract to be considered one way or the other, yet the learned Magistrate has based his decision on this consideration. The liability of the appellant under the contract was to put the respondent into possession of the premises but the appellant's liability ended there. He had no concern whatever with the profit or loss of the respondent's business in the new shops. It could be no answer to his liability to say that the respondent would or might lose money by going into the new shop.

It has been suggested by appellant's Counsel that the respondent, when the appellant broke the contract, should have tried to obtain other equivalent premises as cheap as those which the appellant has contracted to give him.

There is no suggestion in the pleadings or the evidence that the plaintiff could or should reasonably have obtained such other premises. It was not for the plaintiff to satisfy the Court that he could not have obtained such other premises on the same terms. If the defendant sought to have the amount of damages for his breach of contract mitigated in this way it was for him to plead and prove that the plaintiff could and reasonably should have obtained such other premises (see Roper v. Johnson 28 L. T. R. 296 approved by the Court of Appeal in Michael v. Hart 1902 1 K. B. 482 at p. 491).

I agree with the order proposed by the learned President as to the appeal and cross-appeal and costs.