“Zeus sent Pandora down to earth and gave her a little box. The box contained special gifts from the Gods but she was not allowed to open the box ever. Pandora was trying to tame her curiosity, but at the end she could not hold herself anymore; she opened the box and all the illnesses and hardships that Gods had hidden in the box started coming out.”
On 11th March 2020, the World Health Organisation (WHO) declared Covid-19 a worldwide pandemic. The Covid-19 outbreak is a human tragedy that is affecting hundreds of thousands of people. To curb the spread of Covid-19 pandemic, governments across the globe have declared “lockdowns” on unprecedented levels, Malaysia is no exception with its Movement Control Order (MCO).
In addition to the serious implication on people’s health, the Covid-19 pandemic is also causing significant impact on businesses and the economy on a global scale. Albeit necessary, the MCO is an inevitable disruption to businesses and many companies are now left in perplex in trying to meet their contractual obligations, especially dealing with time-sensitive contracts.
This article intends to provide business leaders with the legal repercussion which would entail for contracting parties who fail to perform or fulfil existing contractual obligations during this Covid-19 pandemic.
THE DOCTRINE OF FRUSTRATION
The nature of the law of contracts is that, when the agreement made between parties now become impossible to perform due to the occurrence of an unforeseeable event beyond the control of the parties, the agreement may be deemed as discharged under the doctrine of frustration.
Although our Contracts Act 1950 (“the Act”) does not use the term “frustration”, the doctrine of frustration is governed under section 57(2) of the Act which provides that “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”.
To invoke the doctrine of frustration, the party relying on it must fulfil the following three (3) components:
(a) The performance of the contract must be impossible or unlawful.
For example, if A entered into a contract to take in cargo for B at a foreign port and A's Government later declares war against the country in which the port is situated. The contract becomes void when war is declared.
(b) The impossibility or unlawfulness must happen after the contract was formed.
For example, if A contracts to act at a theatre for six months in consideration of a sum paid in advance by B. On several occasions A is too ill to act. The contract to act on those occasions becomes void.
(c) The impossibility or unlawfulness must be supervening and not self-induced.
For example, if A contracts to marry B, being already married to C, and being forbidden by the law to which he is subject to practice polygamy. A must make compensation to B for the loss caused to her by the non-performance of his promise.
Commercial parties should be aware that the threshold for establishing frustration is high and requires the party relying on it to prove that there is a significant or fundamental change in circumstances which renders the performance of the contract to be physically or legally impossible. In essence, 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 (Ramli bin Zakaria & Ors v Government of Malaysia [1982] 2 MLJ 257).
The doctrine of frustration is not lightly to be invoked as to relieve contracting parties of the normal consequences of imprudent bargains (Pioneer Shipping Ltd v. BTP Tioxide Ltd [1982] AC 724 at 752). It is well-settled that the doctrine of frustration has no room where there is fault on the part of the party pleading it. Another way of putting it is that self-induced frustration is no frustration (Yee Seng Plantations Sdn Bhd v. Kerajaan Negeri Terengganu & Ors [2000] 3 CLJ 666).
In the event that the Court is satisfied that the party has successfully proven that a frustrating event has occurred, the contract will become void on the ground of frustration. This means that the contract becomes void at the date of frustration and parties are discharged from performing any future contractual obligations. However, do note that this brings the contract to an end, as it becomes void, which may not always be the desired result of the aggrieved party.
RELIEF OF FRUSTRATION
Section 15 of the Civil Law Act 1956 provides for the effects of frustration. Where a contract has become impossible of performance or been otherwise frustrated, and the parties have for that reason been discharged from the further performance of the contract, the following shall apply:
(a) Sums paid before the time of discharge by frustration.
All sums paid to B in pursuance of the contract before the time of discharge shall be recoverable, Provided that, if B incurred expenses before the time of discharge for the purpose of the performance of the contract, the Court may, if it considers it just to do so having regard to all the circumstances of the case, allow B to retain or, as the case may be, recover the whole or any part of the sums so paid, not being an amount in excess of the expenses so incurred (Section 15(2) of Civil Law Act 1956).
(b) Sums payable before the time of discharge by frustration.
All sums payable to B in pursuance of the contract before the time of discharge shall cease to be so payable, Provided that, if B incurred expenses before the time of discharge for the purpose of the performance of the contract, the Court may, if it considers it just to do so having regard to all the circumstances of the case, allow B to retain or, as the case may be, recover the whole or any part of the sums payable, not being an amount in excess of the expenses so incurred (Section 15(2) of Civil Law Act 1956).
(c) Right to recover a just sum where one party has provided valuable benefit to the other.
Where A has, by reason of anything done by B for the purpose of the performance of the contract, obtained a valuable benefit (other than a payment of money) before the time of discharge, B may recover from A such sum (if any), not exceeding the value of the said benefit obtained by A, as the Court considers just, having regard to all the circumstances of the case (Section 15(3) of Civil Law Act 1956).
Whether parties can succeed in pleading frustration of contract during this Covid-19 pandemic would differs from case to case having regard to all the circumstances of the case (i.e. subject matter of contract, essence of time, etc.)
Commercial parties should bear in mind that the doctrine of frustration can only be invoked when the frustrating event is not provided for in the four corners of the contract. There may be circumstances where force majeure clause has been incorporated into the contract which provides for the consequence of a frustrating event. Parties may be allowed to discharge the contract or some other form of relief on a contingency without necessarily terminating the contract. If the Court is satisfied that the frustrating event falls within the ambit of the force majeure clause, the Court would rather uphold the force majeure clause as stipulated in the contract.
CONCLUSION
It is not easy to establish the doctrine of frustration. For commercial reasons, the Court would generally seek to enforce bargained contracts rather than dismiss them. A contract would not be frustrated merely because it turns out to be more difficult or onerous to perform. Parties pleading frustration must prove to the Court that it has become impossible or illegal to perform the contract due to an unforeseeable event that has occurred not due to the fault of the contracting parties.
As the Court would generally uphold the commercial terms of the contract as negotiated and agreed between the parties, it is advisable for parties to engage the professional services of a lawyer to ensure that the force majeure clause in the contract are properly drafted to provide for such unforeseen circumstances, whereupon the parties may be allowed for an extension of time to perform their suspended obligations without the need to altogether terminate the contract, or alternatively to discharge the contract without the need to prove frustration in Court.
We hope this article sheds clarity on the legal repercussions faced by commercial parties during this time of unparalleled uncertainties. If your business requires any assistance in regards to the above, we are ready to assist you on any queries you have.
“Epimetheus heard Pandora weeping and came running. Pandora opened the lid to show him it was empty. Quickly, before she could slam the lid shut, one tiny bug flew out. That tiny bug was named Hope. And Hope made all the difference in the world.”
Written by,
Carmen Lai
Associate
Corporate Commercial