Introduction
Force Majeure has been a topical subject during the current Covid-19 pandemic. We should keep in mind that force majeure is a creature of contract. This means that:-
- a party could only utilise force majeure if there is such clause under the contract they have entered into; and
- how force majeure is to applied to their circumstances depends very much on how the force majeure clause is worded.
A majority of bespoke contracts do not have force majeure clauses and in such circumstances, a party could rely on the doctrine of frustration if they can show that there is a change in the circumstances which renders a contract legally or physically impossible to perform. The doctrine of frustration in Malaysia is embodied in Section 57 of the Contract Act 1950.
Elements to be Fulfilled
Section 57 (2) of the Contracts Act 1950 says:
“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.”
In Guan Aik Moh (KL) Sdn Bhd & Anor v Selangor Properties Bhd [2007] 4 MLJ 201, the party claiming that the contract has been frustrated would need to satisfy the Court that:-
- the event upon which the promisor relies as having frustrated the contract must have been one for which no provision has been made in the contract. If the contract provides for such an event, the contract must govern, and section 57 of the Contracts Act 1950 does not apply;
- the event relied upon by the promisor must be one for which he or she is not responsible, meaning that it is not a self-induced frustration; and
- the contractual obligation becomes incapable of being performed as the circumstances in which performance is called for would render it a thing radically different from that which was undertaken by the contract.
For example, in the case of Yew Siew Hoo & Ors v Nikmat Maju Development Sdn Bhd and another appeal [2014] 4 MLJ 413 (“Yew Siew Hoo”), the Court of Appeal held that the contract entered between parties was void in view of an outbreak of the Japanese Encephalitis disease and that the State Government on 20.3.1999 has banned the rearing and sale of pigs in the affected areas.
The formulation of the above test can be seen in 2 English cases of Davis Contractors Ltd v. Fareham UDC [1956] 1 AC 696 where it was held that:-
“…frustration occurs whenever the law recognises that without default of either party a contractual obligation has become incapable of being performed because the circumstances in which performance is called for would render it a thing radically different from that which was undertaken by the contract. Non haec in foedera veni. It was not this that I promised to do.”
Similarly, in National Carriers Ltd v. Panalpina (Northern) Ltd [1981] 1 AC 675 where it was held that:-
“Frustration of a contract takes place where there supervenes an event (without default of either party and for which the contract makes no sufficient provision) which so significantly changes the nature (not merely the expense or onerousness) of the outstanding contractual rights and/or obligations from what the parties could reasonably have contemplated at the time of its execution that it would be unjust to hold them to the literal sense of its stipulations in the new circumstances: in such case, the law declares both parties to be discharged from further performance.”
The Malaysian Federal Court appears to adopt the plain meaning of ‘impossible’ in Pacific Forest Industries Sdn Bhd & Anor v Lin Wen-Chih & Anor [2009] 6 MLJ 293.
Thus, “impossibility” places a high threshold for the party seeking to rely on it. It may be prudent for legislation to be passed to cater for the circumstances arising from the Covid-19 pandemic as was done by Singapore through their COVID-19 (Temporary Measures) Act 2020 to provide clarity to the operation of the relevant obligations under the various types of contracts or legislations.
Remedies Provided
When a contract becomes frustrated, it becomes void. This means that the contract is brought to an end and parties are discharged from the further performance of the said contract.
Under the Contracts Act 1950, the following happens:-
- 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 (Section 66 of the Contracts Act 1950); and
- the promisor must make compensation to the promisee for any loss which the promisee sustains through the non-performance of the promise (Section 57 (3) of the Contracts Act 1950).
Section 15 of Civil Law Act 1956
Sections 15 & 16 of the Civil Law Act 1956 are to be read together with Section 66 of the Contracts Act 1950. Section 15(2) of the Civil Law Act 1956 provides that prior to the frustration of the contract:-
- all sums paid by one party to the other shall be recoverable from that party;
- the sums that are to be paid by one party to the other need no longer be paid; and
- when a party to whom money has been paid to, incurred expenses for the purpose of the performance of the contract, the Court may allow that party to retain or recover the whole or any part of the sums so paid.
Some Thoughts (Extended Movement Control Order)
Careful considerations need to be given to the time in which the contract was being formulated and if it was when the spread of Covid-19 globally being commonly known, frustration would less likely succeed.
The timing and uncertainty caused the unprecedented occurrence of Covid-19 virus meant that any lockdown imposed by the State may be for an indeterminate period. This may, in absence of specific contractual provisions, provide an avenue for a party to assert that the contract is frustrated.
However, the burden will be on the party claiming that the contract is frustrated to show specifically how the Covid-19 pandemic has made the performance of the contract radically different and impossible to perform from what was initially contemplated.
