During an emergency — applicability of force majeure, doctrine

Even if an agreement does not contain a ‘force majeure clause’, obligated parties can still rely on ‘doctrine of frustration’ if the need arises

By NUR HANANI AZMAN / Pic BERNAMA

THE current state of emergency which has to be enforced due to complications arising from the Covid-19 pandemic does not relieve any party from earlier contracts that have been agreed upon.

MH Law partner Wong Mun Hoe said all parties must perform their contractual obligations regardless of the circumstances as it is what they bargained for commercially amid emergency, or the pandemic situation.

He said non-performance of any agreed obligation is considered a breach of contract.

“When a party cannot perform its contractual obligations due to the Movement Control Order or pandemic, it could cause the non-defaulting party to invoke the event of default clause.

“Once the event of default takes place, the process of termination may be triggered and the defaulting party could be liable for damages.

“As such, in the absence of a force majeure clause, the parties may find themselves with no amicable solution,” he told The Malaysian Reserve (TMR).

Nevertheless, Wong said even if an agreement does not contain a “force majeure clause”, the obligated parties could still rely on “doctrine of frustration” if the need arises.

“However, the doctrine of frustration is very restrictive in its application. It only applies when the contract becomes impossible to perform, and not merely becomes more difficult or expensive to perform.

“The legal consequence of a frustrated contract is termination at the point of frustration and the parties will be released from performing their obligations from thereon,” he said.

Commercially, for long-term relationships and for survival of businesses, insisting on contractual rights may not be practical.

Wong said parties that are in an agreement must always be open to formally pro- vide indulgence to the defaulting party, or at least have some space to manoeuvre for renegotiation of new terms that are beneficial to all.

He also said the contractual parties must first look into the agreement whether there is any force majeure clause and whether the terms similar to “pandemics”, “epidemics” or “diseases”, “state of emergency”, or the catch-all phrase like “beyond the reasonable control of the parties” are used to describe as a force majeure event.

“After identifying the event that has been covered in such clauses, it will normally specify a timeline for such event to persist, and one party to give notice to another of such event in order to qualify contractually to be a force majeure event.

“A well-drafted force majeure clause will provide remedies to the parties once it is qualified to be the force majeure event,” he added.

He noted that the remedies include suspension of either party’s contractual right, performance of their contractual obligations and even to terminate the agreement. In other words, the force majeure clause only protects against the “events” described in the clause.

“Questions that one should always ask themselves are: Is your contract’s force majeure clause wide enough or comprehensive enough? Does that include state of emergency or similar terms?

“Does it spell out a mechanism on how to deal with the performance of the contractual obligations or if a force majeure event took place?” he said.

On Jan 18, Prime Minister Tan Sri Muhyiddin Yassin announced the Temporary Measures for Reducing the Impact of Coronavirus Disease 2019 (Covid-19) Act 2020 (Act 829) which will be extended to March 31 this year.

The Act, which was enacted to assist individuals and businesses that were economically impacted by the Covid-19 outbreak, expired on Dec 31 last year.

Lawyer Lim Wei Jiet said Section 7 of the Covid-19 Act provides that, if a party is unable to perform a contractual obligation due to measures taken under the Prevention and Control of Infectious Diseases Act 1988 (Act 342) to control or prevent the spread of Covid-19, the other party can- not exercise his right under the contract (including termination and claiming damages).

However, he said parties that qualify for such protection, including the inability to perform a contractual obligation that occurs between March 18, 2020, and March 31, 2021, only fall under the Schedule to the Covid-19 Act.

“If the inability to perform falls outside such period or the contract is not listed in the Schedule, then a party can escape liability by relying on a force majeure clause.

“However, the contract must specifically provide for force majeure and the protection depends very much on the wording of the force majeure (namely, on whether it covers pandemics),” he told TMR.

Lim said alternatively, parties may rely on the doctrine of frustration, which is harder to satisfy than force majeure.

“Among others, a party must show that there must be a drastic change in circumstance which has rendered the contract performance radically different, such that it is unjust to enforce the original promise.

“A contract is not frustrated merely because it becomes difficult or more expensive to perform,” he explained.


 

THE SCHEDULE TO  COVID-19 ACT

1 Construction work contractor construction consultancy contract and any other contract related to the supply of construction material, equipment or workers in connection with a construction contract.

2 Performance bond or equivalent that is granted pursuant to a construction contract or supply contract.

3 Professional services contract.

4 Lease or tenancy of non-residential immovable property.

5 Event contract for the provision of any venue, accommodation, amenity, transport, entertainment, catering or other goods or services; including for any business meeting, incentive travel, conference, exhibition, sales event, concert, show, wedding, party or other social gathering or sporting event, for the participants, attendees, guests, patrons or spectators of such gathering or event.  

6 Contract by a tourism enterprise as defined under the Tourism Industry Act 1992 (Act 482) and a contract for the promotion of tourism in Malaysia.

7 Religious pilgrimage-related contract.

8 Hire-purchase agreement as defined under Hire-Purchase Act 1967 (Act 212) or leasing contract, that has been entered into by micro-enterprises, B40 (bottom 40% of income group) or M40 (middle 40%) class of persons as specified in the Inland Revenue Board of Malaysia database, as the case may be, for the following vehicles:

a) motor vehicles as classified under section 5 of the Road Transport Act 1987 (Act 3330);

b) goods or public service vehicle —

i) in relation to Peninsular Malaysia, has the meaning assigned to it in the Land Public Transport Act 2010 (Act 715); or

ii) in relation to Sabah, Sarawak and Federal Territory of Labuan, has the meaning assigned to it in the Commercial Vehicles Licensing Board Act 1987 (Act 334); or

c) tourism vehicle—

i) in relation to Peninsular Malaysia, has the meaning assigned to it in the Land Public Transport Act 2010 (Act 715); or

ii) in relation to Sabah, Sarawak and Federal Territory of Labuan, has the meaning assigned to it in the Tourism Vehicles Licensing Board 1999 (Act 594).

[item 8 Ins. PU(A) 385/2020: para.2]

9 Credit sales contract under the Consumer Protection Act 1999.