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Contract frustrated by Music Hall fire
This posting is in response to Hafie Esham’s request to discuss the Law of frustration.
Briefly, this law was first recognized in England to overcome the harshness of previous decisions. In Taylor v Caldwell (1863), two parties contracted to rent a music hall for the performance of concerts.
However, before the performing dates, the music hall was burned down. The court held that the contract was impossible to perform as there was an implied condition that the music hall would be there at the date of the planned concerts.
The law of frustration in Malaysia is found in Section 57(2) of the Contract Act 1950.
In the Court of Appeal case of Guan Aik Moh v Selangor Properties (2007), the court laid down three essential elements that must be satisfied in order for frustration to be applied:
- Firstly, the frustrating event must be one for which no provision has been made in the contract;
- Secondly, the event must be one for which the party is not responsible;
- Thirdly, the event renders it radically different from that which was undertaken by the contract.
Could Covid-19 and MCO issues frustrate a contract?
Well, the short answer is a possibly yes but this is subjected to certain requirements as laid down in the above case.
- The first limb to satisfy is that there are no termination rights such as “pandemic” or “government order” (MCO) in the contract.
- The second limb is easily satisfied as the frustrating event was not the fault of either party
- Lastly, the party seeking relief would have to prove that the Covid-19 pandemic and the MCO have rendered the contract totally different from what the parties had intended.
The third limb is harder to satisfy as it will depend on the circumstances of each case.
Two Examples of Application
- A contract is not frustrated just because it is difficult to perform. See Pacific Forests Industries v Lin Wen Chih (2019) where one party claimed it had no money to pay his debt.
- A contract may become frustrated because of a government order. See Yew Siew Hoo v Nikmat Maju Development (2014) where a contract to construct a waste treatment plant in a pig farm was not possible because the State Government banned the rearing of pigs due to a disease outbreak.
Frustration or Force Majeure defense?
If a contract is frustrated, it will discharge all parties from any further performance of their obligations under a contract.
When compared to a force majeure clause, frustration is inflexible and will not be of much help if parties are interested in keeping a continuing business relationship.
Unlike force majeure, which must be included in a contract to be invoked, frustration needs not be referred to or included in a contract and can potentially be invoked by any party.
A force majeure clause would displace the doctrine of frustration for any event that falls within the scope of the force majeure clause. A force majeure defense cannot be implied as the parties need to negotiate the terms and to agree on them before the contract.
Even if a contract includes a force majeure clause, a court may still find frustration to be applicable.
Conclusion
The question of whether Covid-19 or the MCO can be considered as grounds for frustration of contracts would depend on the facts and circumstances of each case and also the terms of the contract. Ultimately, it is left to the court to decide on the merit of the case.