COVID 19 & MOVEMENT CONTROL ORDER II – FRUSTRATION

by Low Kian Seng

Continuing from my previous post on the impact of COVID-19 and MCO on construction contracts, this post discusses the doctrine of frustration.

A.        INTRODUCTION

1.         The imposition of MCO has caused the operation of non-essential services to come to a halt.  Many businesses are thus severely affected as they are unable to operate until the MCO is lifted / expires. 

2.         As discussed in my previous article, where a contract does not have a force majeure clause, force majeure cannot be relied upon.

3.         Accordingly, the parties will have to seek to consider the common law – specifically the doctrine of frustration – to see whether the contract is still intact or otherwise.  

B.        DOCTRINE OF FRUSTRATION

4.         The doctrine is as follows – where there is a change in circumstances which causes the performance of a contract to be impossible (legally or physically), then the contract is discharged (i.e. terminated).

5.         The courts have held that this doctrine “is only a special case of the discharge of contract by an impossibility of performance arising after the contract was made”[1].

6.         The doctrine of frustration has been codified into our law, see section 57 of the Contracts Act 1950. 

C.        TEST & EFFECT

7.         A contract is said to have been frustrated when the occurrence of an event, subsequent to the making of the contract, renders performance of the contract “a thing radically different from that which was undertaken by the contract”[2].

8.         Please note that the doctrine of frustration will not kick in if:

(a)        the parties have provided in the contract for the situation that has arisen; or

(b)        such alleged frustrating event is self-induced by either party[3].

9.         Generally, the courts will narrowly construe the circumstances leading to the frustration of a contract.  For example, the courts have held that a contract had not been frustrated merely because its performance had been rendered more difficult and onerous.  

(a)        Accordingly, it is advisable for the parties to insert a force majeure clause in a contract so as to provide more certainty to the rights and obligations of the parties upon the occurrence of an unforeseeable event, subsequent to the time when the contract was made.

10.       If the doctrine of frustration kicks in, it automatically discharges the parties from performing their contractual obligations.  This means the contract would have come to an end.  This is different from the consequence of a force majeure clause which usually provides for temporary suspension of performance. 

D.        INSTANCES OF FRUSTRATING EVENTS

11,       The courts have held inter alia the following to be frustrating events:

(a)        outbreak of war;

(b)        introduction of new law after a contract is made, which renders the performance of the contract illegal; and

(c)        injunction obtained by a third party restricting the working hours of a construction contract[4].

12.       An economic crisis is not a frustrating event; it merely made a contract more difficult and onerous – but not impossible – to perform[5]

E,        COVID-19 OUTBREAK & MCO – DOES DOCTRINE OF FRUSTRATION APPLY?

13.       The key question is whether the COVID-19 outbreak and/or the MCO made it impossible for the contract to be performed.  This will depend on the facts and circumstances of each case, including:

(a)        nature of the contract;

(b)        when the contract was made;

(c)        at that time when the contract was made, whether the parties had foreseen or could have foreseen the outbreak of COVID-19 and the subsequent imposition of the MCO; and

(d)       the degree and length of the impossibility of performance caused by COVID-19 outbreak and the MCO.

14.       For example, a contract may have been frustrated if:

(a)        it was made before the COVID-19 outbreak happened or became known;

(b)        it was for the supply of perishable goods that had to be delivered on a date that the MCO was in effect;

(c)        it stipulated time was of the essence; and

(d)       the supplier was unable to deliver the goods because of the MCO.

15.       If a contract is frustrated, the party who has received an advantage from that contract is bound to compensate the other party under section 66 of the Contracts Act 1950.

16.       As for new contracts made after COVID-19 outbreak and MCO began, it is unlikely that frustration will apply.  This is because the parties would or ought to have taken those events into account when making the contract.

F.         CONCLUSION & SUGGESTION

17.       The legal principles on frustration are general; whether or not they apply to a specific situation can be a difficult question and a fertile ground for dispute.

18.       As such, a well-drafted force majeure clause in contracts will be able to help minimizing the risk and provide for more clarity as to the parties’ rights and obligations when similar situations happen again in the future. 

The contents of this article are published for the purpose of general information only; they are not to be regarded, used or relied on as legal advice for any matter.  Please contact us if you require legal advice specific to your case.


[1] Pacific Forest Industries Sdn Bhd v Lin Wen-Chih [2009] 6 MLJ 293, FC, adopting the view of the House of Lord in Joseph Constantine Steamship Line Ltd v Imperial Smelting Corp Ltd [1942] AC 154

[2] See the Court of Appeal in Sentul Jaya Sdn Bhd v Hariram Jayaram & Ors And Other Appeals [2008] 4 CLJ 618.

[3] Guan Aik Moh (KL) Sdn Bhd & Anor v. Selangor Properties Bhd [2007] 3 CLJ 695

[4] Codelfa Construction Pty Ltd v State Rail Authority of New South Wales (1982) 149 CLR 337, 56 ALJR 459, Aust HC

[5] See Sentul Jaya.

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