COVID-19 : CONTRACTUAL OBLIGATIONS OBSTRUCTED PART II – DOCTRINE OF FRUSTARION
The COVID-19 emergency, and resulting measures put in place by governments across Malaysia, has without a doubt caused major disruptions across various industries in Malaysia. As a result, many companies struggled to perform their contractual obligations.
At the outset, if you or your company is in this situation, you may check whether there is a Force Majeure Clause contained in the said contract. If yes, then you may have been told to invoke the force majeure clause. You may read our previous article to learn more about Force Majeure Clause.
Q1: However, what if there isn’t such Force Majeure Clause, but it has become impossible to perform your contractual obligations as a result of the outbreak of COVID-19?
In this case, an affected party will have to look to other provisions of the contract for potential routes out of its difficulties. If the contract does not provide any such routes, then the doctrine of frustration may be relevant depending on the circumstances.
Essentially, pursuant to S.57(2) Contracts Act 1950 (‘CA 1950’), there are 2 instances of frustration, namely when a contract becomes impossible and/or when a contract becomes unlawful after the contract is made.
In other words, a contract becomes frustrated when an event occurs which has rendered it impossible or unlawful to perform the contractual obligations.
Further, as made clear by the Court of Appeal (‘COA’) in Guan Aik Moh (KL) v Selangor Properties Bhd, the COA has laid down three essential elements to be satisfied to constitute frustration:-
- The event upon which the promisor relies must have been one for which no provision has been made in the contract.
- The event relied upon by the promisor must be one for which he or she is not responsible.
- The event which is said to discharge the promise must be such that renders it radically different from that which was undertaken by contract.
The other instances of frustration would be the outbreak of war, Destruction of subject matter, Death or incapacity for personal service and statutory prohibition. However, a contract is not deemed frustrated merely because it is inconvenient or difficult to perform.
In the Federal Court case of Pacific Forests Industries Sdn Bhd v Lin Wen Chih, the honourable court held that:-
“[22] A contract does not become frustrated merely because it becomes difficult to perform. If a party has no money to pay his debt, it cannot be considered impossible to perform as it is not frustration…”
This illustrates that a party cannot suspend its contractual obligations just because the party’s obligation has become more onerous due to a change of circumstances.
For instance, financial crisis and difficulty in interpreting the terms of the contract is non-frustration situation. Needless to say, it must be in the situation that considered impossible and/or unlawful to perform the contractual obligations.
Thence, this prompts the question – if the COVID-19 has the potential to be an event of frustration, has it been sufficiently permanently disruptive to give rise to contractual frustration?
Obviously the answer will hinge on the nature and wording of each individual contract. To rely on the doctrine of frustration, it must be proved that the COVID-19 outbreak has rendered the contract legally and physically impossible of performance.
Q2: What’s the effect/remedy if the doctrine of frustration is proved?
Should any of the contracts and/or agreements be deemed frustrated pursuant to S.57(2) of CA 1950, such contract becomes void. However, the termination is only as to the future obligations. It is not void from the beginning.
In the virtue of S.15(2) Civil Law Act 1956 (‘CLA 1956’), it provides that when the contract is proved frustrated, all sums paid by B to X pursuance of the contract entered before the parties were discharged, B is entitled to recover from X the sum so paid.
Other than payment of money as per s.15(2) CLA 1956, any others valuable benefits obtained by X from B before both parties discharge of the contract, B may recover the value of the said benefit as the Court consider just, having regard to all the circumstances of the case, as dealt under S.15(3) CLA 1956.
Further, pursuant to S.66 CA 1950, when the contract is deemed and proved frustrated under S.57 CA 1950, whoever receives any advantage under the void agreement, is entitled and/or bound to restore or make compensation to the party from whom he received it.
Q3 : Am I 100% entitle to rely on the Doctrine of Frustration for excusing myself for the non-performance of the contractual obligation in this pandemic?
Depends. The principles laid down as abovementioned, it’s the legal theory. However, ultimately, the question of whether this pandemic can be considered as grounds for Frustration for your case, it’s really case-to-case basis. Hence, you should consult your lawyer if you find yourself in such predicament.
Author: Soo Jess Min, Intern
Editor: Patrick Tan
