The impact of armed conflicts on commercial disputes: in the context of Malaysian law

Rutheran Sivagnanam

RSA Chambers, Kuala Lumpur

rutheran@rsachambers.com

The outbreak of armed conflicts, both domestic and abroad, have potential implications on both contracts and commercial relations as a whole. These implications may arise due to specific legislation or regulatory measures, or as a consequence of the general law of contract and in particular the principles governing performance or frustration. Armed conflict may also catalyse entanglements in the political arena and trigger broader economic disruption which alters commercial dynamics and affects contractual performance. All of these events, to a greater or lesser degree, influence trade flows, and in turn the ability to perform contracts and commercial obligations. Disputes consequently arise, and the parties are left to consider the available remedies under the respective contracts. This article seeks to examine the effects of conflict over international and national economic flows and the implications which follow within the context of Malaysian law.

Legal status of armed conflict in Malaysia

In Malaysia a declaration of war or a state of emergency is an act of the executive authority proclaimed under Article 150 of the Federal Constitution, in which Yang Di-Pertuan Agong (Malaysia’s constitutional monarch and head of state) is satisfied that a grave emergency exists whereby the security, or the economic life, or public order in the Federation or any part thereof is threatened.

It follows that, once such a declaration of war or state of emergency has been made, the performance of the contract in question may either be hindered, delayed or prohibited. In such an instance, the contractual implications are the subject of direct and specific legislation or the common law.

A recent example albeit in a different context is the Emergency (Essential Powers) Ordinance 2021 (‘the Ordinance’) (which was revoked in December 2021), officially gazetted on 14 January 2021 for the purposes of curbing the Covid-19 pandemic. This was the product of exercise of powers by Yang di-Pertuan Agong under Article 150 of the Malaysian Federal Constitution. The Ordinance serves to restrict the performance of contracts where it becomes commercially impossible. Therefore, the performance of contractual obligations in such circumstances or in certain contracts may be frustrated on the basis that performance would be no longer lawful. Similar proclamations may be made in the case of trade with an enemy state or a state which acts in accordance or in complicity with such a state.

At common law, contracts entered into between a Malaysian entity and an entity in a nation with whom a declaration of war is issued would be frustrated and deemed void.[1] The Contracts Act 1950 codifies the concept of illegality and in this regard has premised the same on breaches of public policy, of which ‘trading with enemy’ is a recognised head.

Armed conflict: secondary implications and frustration/force majeure

The situation becomes more complicated, when Malaysia is not in a state of war with any particular nation but when the supply chain is facing disruption due to armed conflict. Such disruption has the potential to make contractual performance either more expensive; or impossible.

Depending on the consequence of the intervening event, such armed conflict may or may not be understood as a force majeure event – which is outside the control of either party to a contract. In Malaysia, the primary legislation that governs the contractual relationship between parties and which codifies the principle of ‘frustration’ is the Contracts Act 1950. The principle of frustration is entrenched in Section 57(1) of Contracts Act 1950 which provides that ‘An agreement to do an act impossible in itself is void’. Section 57(2) stipulates that: ‘A contract to do an act which, after the contract is made, becomes impossible, or by reason of some event which the promisor could not prevent, unlawful, becomes void when the act becomes impossible or unlawful.’

A contract is frustrated when there is a change in the circumstances which renders a contract legally or physically impossible of performance.[2]

Force majeure clauses are not uncommon in commercial contracts. They seek to define what constitutes frustration, the available remedies and its consequences. Where force majeure is not provided for in the contract, the doctrine of frustration (which is legislated in Malaysia) may be applicable.

Under the Contracts Act 1950, if a contract becomes impossible to perform due to a frustrating event, the contract will be deemed void. Both parties will be discharged from further performance under the contract and are bound to restore any advantage obtained from the other party. The remedies flowing from frustration of a contract which becomes void are provided under:

• Section 66 of Contracts Act 1950 – namely ‘any party who has received any advantage from the other party is bound to restore it or to make compensation for it, to the person from whom he received it.’;
• Section 15(2) of Civil Law Act 1956 – namely all sums paid or payable to any party shall be recoverable from him as money received by him for the use of the party by whom the sums were paid, and in the case of sums so payable, cease to be payable;
• it is settled however that the mere fact contractual obligations have become more onerous or expensive is not a ground of frustration.[3]

Examples of conflicts and their implications

An example of an event of frustration triggered by an event abroad was the blockage of the Suez Canal as a result of the outbreak of war between Britain and Egypt. International trade and shipping contracts were disrupted. Where the performance of the contracts was rendered impossible, the contract may amount to a frustration. The House of Lords in Tsakiroglou & Co Ltd v Noblee Thorl GmbH [1962] AC 93 opined that an increase of expense is not a ground of frustration. This authority has been applied in the Malaysian cases, such as Ramli bin Zakaria & Ors v Government of Malaysia [1982] 2 MLJ 257 and Yee Seng Plantations Sdn Bhd v Kerajaan Negeri Terengganu & ORs [2000] 3 MLJ 699.

In the Malaysian case of V Kandiah v The Government of the Federation of Malaya [1952] 1 MLJ 97, the plaintiff had worked in the Postal Department of the Government of the Federated Malay States since 13 January 1927. During the occupation of Malaya by Japanese forces, the plaintiff stayed behind and applied to be employed at the Department administered by the Japanese. He subsequently went to India and volunteered in the Indian National Army. After the Liberation of Malaya, he applied to be reinstated to his previous position or be allowed to retire soon after his return to Malaya. He was informed that he was dismissed. The plaintiff claimed that it was a wrongful dismissal. The defendant then contended that his contract of service was frustrated by reason of the Japanese occupation of Malaya. The High Court held in favour of the defendant.

In HA Berney v Tronoh Mines Ltd [1949] 1 MLJ 4, the plaintiff sued for breach of contract of service due to the defendant company’s evacuation from Tanjong Tuallang following the invasion of Malaya by Japanese forces. The plaintiff who elected to stay claimed for three months’ salary as due to him. The Court per Evans J found that the Contract was frustrated and therefore void. This case relied on the common law doctrine of frustration on the premise that the invasion of Malaya by the Japanese was regarded as a frustrating event.

Modern applications of old principles

In a modern context, these principles have had to be applied to a more complex fact pattern. The War in Ukraine has seen a disruption in the supply chain for vital agricultural produce such as wheat and other commodities including grains and vegetable oils. The disruption in the supply chain has implications on the ability of companies in Malaysia to fulfil their supply obligations either domestically or in terms of their export obligations.

Broadly in such circumstances the consequences of the conflict could be summed up as follows:

1. A party may be able justifiably to invoke a time extension provision under the contract.[4] Or the counterparty may be estopped from relying on time on a strict and absolute basis.
2. Several forms of contracts contain stipulations to such effect, for example PAM Contract 2006 for construction contracts and The Palm Oil Refiners Association of Malaysia (PORAM) Contract No 7 for commodities.
3. A party may be able to justify invoking a cost escalation provision.[5]
4. The mere fact that an alternative supply source affects the margin for a given transaction or renders it less profitable does not of itself release the parties from their obligations, nor does it constitute an event of frustration.[6]
5. The event becomes an event of frustration only where the act becomes impossible or unlawful,[7] or where due to hostilities the performance has been rendered as impossible.[8]

A recent occurrence which takes some of the events of disruption that arise during armed conflict into account were experiences of the Covid-19 pandemic. The lockdown in Malaysia banned many businesses from operating during specific hours of the day or at all. Interstate and inter-district travel was prohibited, and certain areas were the subject of strict emergency-type orders.

The Temporary Measures for Reducing the Impact of Coronavirus Disease 2019 (Covid-19) Act 2020 (Covid Act) is one such legislation available to excuse non-performance of contractual obligations due to the outbreak of Covid-19. The Covid Act provides that the inability of any party to perform any contractual obligation under a contract which falls under the scope of the Schedule to the Covid Act shall not entitle the other party to exercise their rights under the said contract. In the alternative, contractual parties may seek to invoke the force majeure clause that is provided in a contract, or the doctrine of frustration in the absence of frustration clause.

Conclusion

The challenge faced by a trading nation such as Malaysia with an export focus to a multitude of importers of varying nationality can be summarised as follows:

• the treatment of the principles of frustration or force majeure under the varying jurisdiction which may govern a given contract;
• the capacity to seek extensions of time or other variations of terms;
• the capacity to invoke price escalation provisions; and
• the applicability of the principle of estoppel to prohibit the strict insistence on terms of a contract which was concluded without foresight or contemplation of the intervening event.

The challenge in the Malaysian context is to manage these variables across numerous trading nations and contracts which are subject to different laws, forms of contract and arbitral jurisdictions. The risk of pre-emptive measures such as the calling of performance guarantees and other equivalent provisions place a particular pressure on supply contracts and disputes arising therefrom, even where the transaction does not involve trade with an enemy state or a nationality thereof.