The Supreme Court judgment in SC Appeal No. 08/2017 is a significant case in Sri Lankan contract law dealing with frustration of contract due to supervening impossibility, particularly in the context of a lease agreement disrupted by the 2004 tsunami.

🔍 Case Summary
• Parties:
• Plaintiff-Respondent-Appellants: Pallocci Donatella & Palermi Luca (Italian nationals).
• Defendant-Appellant-Respondent: Yamuna Kanthi Stein.
• Subject Matter: A property in Pelana, Weligama leased to the plaintiffs to operate a tourist resort.
• Issue: Whether the tsunami damage amounted to frustration of the lease agreement, releasing the plaintiffs from further obligations and entitling them to recover advance rental.

⚖️ Facts
• Lease agreement dated 23.08.2004 commenced on 15.11.2004 for 5 years.
• Monthly rent: EUR 1,400; full year’s rent paid in advance.
• Property: Tourist resort with 4 two-storied buildings (8 rooms total) and a restaurant.
• Tsunami on 26.12.2004 caused significant destruction:
• Restaurant fully destroyed.
• Ground floors heavily damaged; furniture and fittings washed away.
• Two tourists died.
• Plaintiffs sought refund of EUR 16,840 for unused lease period.
• District Court: Held contract frustrated; plaintiffs entitled to refund.
• High Court: Reversed, citing failure of venture due to financial impracticability, not frustration.
• Supreme Court: Appeal allowed.

📚 Legal Analysis

🔹 Key Question of Law

Did the High Court err in failing to consider the “frustration of adventure” under the lease?

🔹 English Law Overview (For Context)
• Frustration discharges a contract when a supervening event makes performance:
• Impossible
• Illegal
• Radically different from what was agreed
• Key cases:
• Taylor v Caldwell – Destruction of music hall
• Krell v Henry – Cancelled coronation procession
• National Carriers v Panalpina – Doctrine can apply to leases

🔹 Roman-Dutch Law (Applicable in Sri Lanka)
• Based on clausula rebus sic stantibus: contracts are formed assuming current conditions persist.
• A contract is discharged if:
• Performance becomes physically or legally impossible,
• Due to vis major (e.g. natural disaster) or casus fortuitus,
• Through no fault of the parties.
• Tsunami qualifies as vis major.

🔹 Court’s Reasoning
• Although not completely destroyed, the property suffered substantial damage making it unusable as a resort.
• Evidence from:
• Grama Niladhari – confirmed heavy damage.
• Respondent’s own police complaint – estimated Rs. 6 million in damage.
• Contract clauses did not contemplate tsunami or assign risk for such damage.
• Performance became impossible in the intended form (i.e., running a tourist resort).
• Thus, the foundation of the lease contract had collapsed.

✅ Outcome
• Supreme Court allowed the appeal, affirming the District Court’s decision.
• Held that there was frustration of contract under Roman-Dutch principles.
• Plaintiffs were entitled to recover the unused portion of the advance rent.
• Judgment of High Court set aside.

🧠 Key Legal Takeaways
1. Frustration in Sri Lankan law (Roman-Dutch) applies where an unforeseeable event destroys the contractual foundation.
2. Partial destruction is sufficient if it defeats the contract’s essential purpose.
3. Even lease agreements can be discharged for supervening impossibility.
4. Tsunamis and natural disasters are considered vis major, absolving liability where no fault exists.
5. Courts will examine the contract, intent, and extent of damage when determining frustration.