The Doctrine Of Frustration And Force Majeure Clause In Sale And Purchase Agreements For Real Estate Transactions In Malaysia Post Covid-19

The Doctrine Of Frustration And Force Majeure Clause In Sale And Purchase Agreements For Real Estate Transactions In Malaysia Post Covid-19

It cannot be denied that the novel Coronavirus of (”Covid-19”) pandemic has been declared as a Public Health Emergency of International by the World Health Organisation, (‘‘WHO’’). As a result, this Covid-19 pandemic crisis has always been in the limelight regarding the possible impacts that have brought in drafting the Sale and Purchase Agreements (”SPA”) for real estate transactions, among the lawyers nationwide since the beginning of 2020.

Notably, Sale and Purchase Agreements (”SPA”) is a legally binding contract between the vendor and the purchaser. Whereby, the express clauses as stated in the contract deviate greatly depending on its terms and the parties. A recent question is often posed by the contracting parties as to the Covid-19 pandemic or Movement Control Order (”MCO”) that was imposed since 18.3.2020, whether these circumstances have impacted in penning the Sale and Purchase Agreements (‘‘SPA’’).

In this article, we serve the purpose to highlight the doctrine of frustration and the Force Majeure clause in Sale and Purchase Agreements (”SPA”) concerning real estate transactions.

• Force Majeure clause

Force Majeure clause is essentially a clause referred as a party will be excused from liability to the other party for any losses, damages, delays or hindrance by the ‘‘extraordinary event of circumstances beyond the control of the parties’’, which prevents one party from performing and fulfilling their obligations as stated under the contract. The attribution caused by the defaulting party may result from the circumstances that are not reasonably foreseeable, or performance of whose obligations is affected by government restrictions (ie.: Land office/ registry, Stamping Office and Local Authority).

The instances of hindrance by the ‘‘extraordinary event of circumstances beyond the control of the parties” are distilled as follows:

• Act of war: terrorism
• Act of God
• National Emergency
• Epidemic
• Pandemic
• Natural catastrophes: earthquakes, lightning, floods, storms, typhoons
• Nuclear explosion
• Riot
• Government Restrictions

*These instances hindrance by the extraordinary event of circumstances beyond the control of the parties as stated above are not exhaustive*

This Force Majeure clause is often enclosed in the SPA for real estate transactions. It is important to note that the wording of the terms in the contract must be well-drafted without ambiguity. In the absence of this clause, both contracting parties are only allowed to resolve their disputes by relying upon the clauses within the ambits of the SPA.

Apart from that, the common remedies for the contracting party seeking to invoke this clause are, namely:-

• Termination of the contract,
• Exclusion of the party’s liability for non-performance or delay
• Suspension of contractual obligations.

Alternatively, the extension of the SPA (ie.: completion period/extended completion period/ delivery of vacant possession) or waiver of the late payment interest are inevitable during this MCO period.

Further, the contracting party seeking to invoke this clause must ensure that the contract consists of a ‘Force Majeure clause’, if so, whether the Covid-19 pandemic can be categorised as ‘pandemic’ (not as ‘Act of God’). Subsequently, the contracting party is required to inform the other party for bringing in this clause, to ensure parity in treatment between both contracting parties. In addition, reasonable steps must be taken by the defaulting party to mitigate the situation.

To put it all in perspective, the court is empowered with the discretion to look into the construction of this clause to decide whether such a clause is wide enough to cover the contingency of which had materalised and whether the defaulting party has taken the reasonable steps to mitigate the situation.

The doctrine of Frustration

In the absence of a force majeure clause, the doctrine of frustration is the alternate recourse to argue on for termination of the contract. This doctrine is governed under sec. 57(2) of Contracts Act 1950 in Malaysia.

Frustration refers the changes in the contract render it legally or physically impossible to be performed. In which, it is by no fault of either party nor the defaulting party subsequent to its formation of the contract between both contractual parties. In actual fact, the contractual obligation becomes incapable of being performed and the circumstances render it as radically different from that which was undertaken by the contract. The objective of this doctrine of frustration is to find an appropriate way of allocating the risk of supervening events. The test for frustration is whether the event which causes the impossibility was all might have been anticipated. Thus, if the event is anticipated, foreseen or foreseeable event, the contract cannot be frustrated.

The following events as shown illustrates the doctrine of frustration with case law in support:-

• Inability to pay off the debt
• PacificForest Industries Sdn Bhd & Anor v Lin Wen–Chi [2009]  6 CLJ 430

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 as impossible to perform as it is not frustrated. Neither can you plead for frustration because the terms of the contract make it difficult to interpret, unless if it cannot be performed or becomes unlawful to perform, then the party who is to perform his part of the bargain can plead for frustration.

• The Center (76) Limited v Victory Serviced Office (HK) Limited [2019] HCA HKCFI 2881

Tenants relied on the doctrine of frustration to render the Tenancy Agreement as frustrated due to social disruption and Covid-19, in respect of failing to pay the outstanding rent and other charges, amounting to over HK$28 million, whereby, the proceedings commenced by the landlord.

Hong Kong Court of Appeal ‘‘acknowledged that the COVID-19 pandemic and social disruption may have been unforeseen at the time of execution of the Tenancy Agreement and that such events must have rendered the tenant’s business operations more onerous and not profitable. It was held that none of this had “fundamentally or radically changed the nature of the parties’ obligations” so as to render it “physically or commercially impossible” to fulfil the Tenancy Agreement’’.

• Inability to deliver the vacant possession
• Hariram Jayaram & Ors v Sentul Raya Sdn Bhd [2008] MLJ 852, CA

The 1997 financial crisis merely made it more onerous and perhaps more expensive for the appellant to perform the obligations. Hence, the failure to deliver the vacant possession due to 1997 financial crisis did not render the contract as frustrated.

• Evacuation of residents from the premises to 10-day isolation order by the Department of Health in light of SARS outbreak
• Li Ching Wing v   Xuan Yi Xiong [2004] 1 HKLRD 754

Hong Kong court held that a 10-day isolation was insignificant in view of the 2-year duration of the lease and thus did not “significantly change the nature of the outstanding contractual rights or obligations” of the parties.

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