Navigating Geopolitical Disruption with Force Majeure Clauses (Malaysia)

Doctrine of Frustration

Pursuant to Section 57(1) and (2) of the CA 1950, a contract is frustrated where the acts required to be performed under the contract becomes impossible or unlawful. In such event, the contract becomes void. Section 57(3) of the CA 1950 further requires a promisor to compensate a promisee, if the promisor promised to do something which he knew, or, with reasonable diligence, might have known, and which the promisee did not know, to be impossible or unlawful, for the promisee to be compensated with the loss which he sustained through the non-performance of the promise.

In an illustration provided under the CA 1950 where the doctrine of frustration applies, Party A contracts to take in cargo for Party B at a foreign port. The Government of Party A afterwards declares war against the country in which the foreign port is situated. The contract becomes void when the war is declared.

Notwithstanding the illustration above, the application of the doctrine of frustration is fact-specific and depends on the facts of each case. In order to apply the doctrine of frustration, it needs to be proven that the unlawful or impossible event (i.e. the supervening event) has rendered performance impossible or that the contract has fundamentally changed from what was originally contemplated by the parties,※1 rather than merely more difficult or expensive. In short, the court must find it practically unjust to enforce the original promise. In addition, the contract must have been one for which no provision has been made in the contract. This is because if a provision has been made, then the parties will generally be taken to have allocated the risk between themselves on the same.

The doctrine of frustration under Section 57 of the CA 1950 would also not apply if the supervening event is caused by the party seeking to rely on it, such as, if such party has breached the contract or caused the occurrence of the said event. For example, a charterer who, in breach of the contract, orders a ship into a war-zone, thereby causing the ship to be detained, cannot rely on the said detention as a ground of frustration. This is commonly referred to as self-induced frustration, which is ineffective for the purposes of Section 57 of the CA 1950.※2

Given the limited circumstances where the doctrine of frustration may be applied based on the above, and the consequences that a frustrated contract becomes void, parties may often prefer to include clearly defined force majeure clauses to provide greater contractual certainty.

Force Majeure

It is trite under Malaysian law, that for a party to rely on or put in defence of force majeure, the relevant clause must be specifically and clearly provided in the contract and cannot be implied by law.※3 There can therefore be no general rule as to what constitutes a situation of force majeure. Whether such a (force majeure) situation arises, and the rights and obligations that follow, would depend on what the parties, in their contract have provided for.

Malaysian courts generally adopt a strict interpretation of such clauses and will examine whether the relevant event falls within the events specified in the contract and whether the contractual requirements for invoking the clause have been satisfied. Such events generally cater to certain unforeseeable events that would render the parties’ obligations under the contract impossible to perform. It may be prudent to note that, such clauses commonly provide, expressly or impliedly, that the clause cannot be relied upon if the effects of what would otherwise be a force majeure event or state of affairs could be avoided by the exercise of reasonable endeavours by the party affected. In other words, the party relying on the force majeure clause should prove that there were no reasonable steps that it could have taken to avoid or mitigate the event or its consequence.※4

Examples of supervening events or force majeure events stated in a force majeure clause include “acts of God”, “epidemics”, “natural disasters” and “war”, on the condition that such events actually cause the inability of the party which intends to rely upon the force majeure clause, to comply with its obligations under the contract. Contrary to the doctrine of frustration above, with a force majeure clause, the contractual parties may agree in writing on the scope of force majeure events that avail the parties to the benefit of such clause. In the context of the geopolitical developments mentioned in this article, a party intending to rely on the force majeure clause must successfully prove that the geopolitical developments have made it impossible for the party to perform its contractual obligation.

Subject to the wordings of the “force majeure” clause in the contract, such clause generally relieves a party from its obligation to perform under a contract on the occurrence of a specified force majeure event or state of affairs covered within the scope of the clause and there may even be examples of automatic termination of the contract or termination with prior notice on the condition that the force majeure event continues to subsist throughout the period after the party exercises its rights under the force majeure clause up until the effective date of termination.

Practical Legal Considerations Moving Forward

For existing agreements, contractual parties should peruse their contract to understand their obligations in view of the force majeure events. For future agreements, it may be prudent for parties to have clarity regarding their roles and responsibilities, including the following, if such event arises.

1. Clear Definition of the Force Majeure Events
   Contracts should clearly define the events that constitute force majeure, including geopolitical risks such as war, sanctions, embargoes, and supply chain disruptions.
2. Notification and Procedural Requirements
   Force majeure clauses commonly require prompt written notice and supporting evidence of the impact on performance. Failure to comply with these procedural steps may prevent reliance on the clause.
3. Mitigation Obligations
   Affected parties are usually required to take reasonable steps to mitigate the impact of the event, such as sourcing alternative suppliers or transport routes where feasible.
4. Allocation of Risk and Consequences
   Parties should consider what happens if a force majeure event persists for a prolonged period. Some contracts may provide for suspension of obligations for a defined period, followed by a right for either party to terminate the contract if the disruption continues.