The World Health Organization has declared the Covid-19 outbreak a global health emergency. Following the said outbreak, the concept of frustration and contractually agreed force majeure clauses may become relevant in the event that the performance of a contract is affected.
Whether the outbreak of Covid-19 constitutes force majeure under a contract will ultimately be interpreted from the terms of the contract.
Force Majeure is defined in Stroud's Judicial Dictionary of Words and Phrases 6th Edition as: -
"The words force Majeure, taken from the Code Napoleon and inserted as an exception in shipbuilding contracts were held by Baihache 3., to have a more extensive meaning that "act of God" or "Vis major". He held that they covered dislocation of business owing to (a) a universal coal strike. (b) accidents to machinery:..."
The term force majeure is not intended to enable a party to renege on its obligations. Rather it is intended to protect each party from strikes, lockouts, breakdowns or other circumstances beyond the control of the contractual parties.
China has announced it would issue force majeure certificates to Chinese companies unable to fulfil contractual obligations with foreign counterparts. However, at the moment, Malaysia does not seem to have the same privilege.
What if the terms of the contract do not specify an event as triggering a force majeure clause; can the parties still be discharged from their contractual obligations? The parties may be able to argue that the contract is frustrated, as unforeseen events occur which render the performance of the contract radically different from what the parties intended.
However, it is essential to note that a contract which is difficult to perform does not mean that the contract is frustrated. This has been stated by the Federal Court in the case of Pacific Forest Industries Sdn Bhd & Anor v Lin Wen-Chin [2009] 6 MLJ 293 at page 56 at para 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. Neither can he plead frustration because the terms of the contract make it difficult to interpret. If it cannot be performed or becomes unlawful to perform, then the party who is to perform his part of the bargain can plead frustration. The doctrine of frustration is only a special case to discharge a contract by an impossibility of performance after the contract was entered into"
In the Federal Court case of Goh Yew Chew & Anor v Soh Kian Tee [1970] 1 MLJ 138 at page 141 which adopted Chitty on Contracts (22nd Edition) which stated as follows:
"The doctrine of frustration is relevant when it is alleged that a change of circumstances after the formation of the contract renders it physically or commercially impossible to fulfill the contract."
The concept of frustration is strictly applied. Just because performance is made harder does not equal to impossibility of the performance of a contract.
Whether Covid-19 is the key for termination of a contract very much depends on the terms of the contract, and the circumstances of each case, i.e. the actual extent of disruption and delay.
Should Covid-19 be found to constitute a force majeure event, the parties to such contract may be able to suspend their obligations to avoid legal action being taken against them.
How & Hospera advise companies in drafting and enforcing force majeure clauses. Please contact Yvonne How (This email address is being protected from spambots. You need JavaScript enabled to view it.) and/or Nor Hospera Roswina (This email address is being protected from spambots. You need JavaScript enabled to view it.) for further information.
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