Can Force Majeure And Frustration Be Of Avail To Avoid Contractual Obligations Due To The Coronavirus (Covid-19) Pandemic?


Ranjan Chandran, Partner (Commercial & Construction Department)
Chandni Anantha Krishnan, Associate (Commercial & Construction Department)
Harneshpal Karamjit Singh, Associate (Commercial & Construction Department)

From 2020 2 MLRA i Judgment Express.

Hakem Arabi & Associates

Introduction: The Common Business Owner’s Plight

Ever since the World Health Organization (“WHO”) declared Coronavirus (“COVID-19”) a pandemic on 11 March 2020 and the Malaysian Government enforced the Movement Control Order (“MCO”) pursuant to the Prevention and Control of Infectious Diseases Act 1988 and the Police Act 1967 from 18 March 2020, many common business owners have been concerned on the tough times that lie ahead in fulfilling their contractual obligations and/or contractual covenants.

Many business owners due to not being able to operate their business with the Pandemic Cvid-19 and MCO may breach of contract for failure to comply with Terms and Conditions on :-

  • payment terms
  • performance of obligations/duties
  • time period to comply

This will result in unnecessary problems for the common business owner who will face termination of their contracts and Court actions filed by the other party to claim loss and damages with interest and costs.

There may be breached of contracts that may end up with the consequences of the common business owner being adjudged a Bankrupt or Winding-Up of their companies.

What are the possible options open for the common business owner?

  • Rely on the Force Majeure clause in the Agreement
  • Rely on the Doctrine of Frustration of contract

What is “Force Majeure”?

It is a contractual term agreed by parties to the contract to deal with extraordinary situations that may arise over which, the said parties have little or no control and thus would prevent the performance of the contract.

It covers unforeseen events - wars, acts of god, certain strikes that will excuse a party from its duty to perform the contract."

Can the (COVID-19) Pandemic be a reason to invoke the Force Majeure Contract clause to avoid contractual obligations?

It will depend on how the Malaysian Courts interpret the Force Majeure clause as we have no precedent case in Malaysia.

Business owners will have to read their contract terms with a fine-tooth comb to see if there is a Force Majeure clause in their agreement and what is the scope and extent it covers. It must be noted that Force Majeure cannot be implied into a contract.

Business owners must then ascertain if the Force Majeure clause covers:-

  • Act of God
  • National Emergency
  • Public health emergency
  • Communicable disease outbreak
  • Virulent disease
  • Epidemic or Pandemic

The business owner will have to see if the List of events of Force Majeure are intended to be non-exhaustive so as to encompass a Broader List and Pandemic situation such as COVID-19.

The Business owner may argue that Covid-19 Pandemic is an Act of God beyond the control of man to justify the shield of the Force Majeure clause.

However this will depend on the Courts as the opposing view will be that, it is presumptuous to confidently state that the COVID-19 Pandemic was ‘An Act of God’ when there is no tangible evidence to that effect.

Force Majeure Clause Vis-a-Vis the MCO

This is once again an arguable issue as there are no precedent case authorities in Malaysia.

The Business owner may argue that the measures taken by the Government such as forced quarantines, stay at home orders, restricted movements, travel bans, local and foreign imposed, have all brought his business to a complete closure and standstill not generating any income and a valid reason for the impossibility of complying with contractual terms of a contract warranting the protection of Force Majeure clause.

Business owners must be prepared for the opposing view that MCO is not a good or valid reason to rely on Force Majeure, since Government imposed the MCO in the best interest of the people of the country, their health and safety of paramount consideration to check the spread of the Pandemic.

It is the Authors respectful views that no affirmative views can be expressed as this Pandemic is unprecedented and there are no case references in Malaysia. Much will depend on the discretion as exercised by the Learned Judge of the Court judiciously, with the paramount intention of ensuring justice and fairness.

What are the Remedies/Reliefs Available to the Business Owner?

If the Force Majeure clause applies, then there may be the following remedies:-

  1. A suspension of the contract and/or obligations for a short duration.
  2. There will be a moratorium and/or extension to comply with the contractual and payments terms.
  3. There is then the other possibility that if the Force Majeure event is prolonged or continuing indefinitely to the detriment of the said business owner, then, then he/she may move the Honourable Court seeking the relief for the termination of the contract and all obligations thereto.

How should Force Majeure Clauses in future contracts be drafted

Contracting parties must hereinafter be more prepared and ensure that Force Majeure clauses should cover a wider latitude and the unavoidable, unforeseeable and irresistible events like an Epidemic, Pandemic, communicable disease outbreak and communicable virulent diseases.

If the Force Majeure clause is water-tight, then our Malaysian Courts will be obliged to give effect to it, applying the Literal Construction principle of the Contract law.

If there is an ambiguity in the Force Majeure clause, then our Malaysian Courts may apply the ‘Contra Proferentum’ Rule to strictly construe and interpret as against the interest of the business owner who is seeking to rely upon it.

What is the Doctrine of Frustration

Whilst Force Majeure is a creature of contract as explained earlier herein, Frustration is a creature of statute/common law.

A word of caution in that the Force Majeure clause in a contract of a business owner may oust the operation of the Doctrine of Frustration, as parties to the contract have already determined as to what are the specific events which constitute the risk of the Frustrating event.

The relevant section in our Contracts Act 1950 is Section 57(2) of the Contracts Act 1950 which reads as follows:- “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.

The Malaysian Courts have formulated a three (3) elements test for the Doctrine of Frustration to apply as follows:

  • The event must have been one for which no provision/clause exists in the contract;
  • The person seeking to rely on the event must not be the person that caused/is responsible for the event;
  • The event which is said to have discharged the obligations must be such that renders it radically different from that which was undertaken by the contract.

Will COVID-19 and/or the MCO trigger Frustration?

If the common business owner intends to rely on the COVID-19 Pandemic and the MCO as an event that declares the contract Frustrated then that event must frustrate the contract altogether and not merely affect the performance temporarily.

As an example, if a contract stipulates a duration of twenty four (24) months to fulfill an obligation of a party, and that party will now require additional time of thirty six (36) months, then by reason of the COVID-19 and MCO, the other party may be held obliged to grant the extra time towards completing the contract. In such an instance there will be no Frustration.

What happens if Frustration applies?

Frustration results in the termination of the contract and the terms of the contract cease to operate.