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Law of Contract – Frustration – Covid-19 – Movement Control Order – Total Lockdown

My company has entered into contract with Company A. The outbreak of the coronavirus (“COVID-19”) has resulted in Movement Control Order (“MCO”) and Total Lockdown. This has affected the performance of the contract. Can I rely on the doctrine of frustration to terminate the contract?

 What is doctrine of frustration?

In short, a contract is frustrated, when after the contract is made, a change of circumstances or event occurs. The change makes it impossible or unlawful to perform the contractual obligation.

Three (3) elements to constitute frustration:

  1. The event upon which the promisor relies must have been one for which no provision has been made in the contract.
  2. The event relied upon by the promisor must be one for which he or she is not responsible.
  3. The event which is said to discharge the promise must be such that renders it radically different from that which was undertaken by contract.

Whether you can rely on frustration depends on the following situations:

  1. If you have no money to pay debt during MCO or Total Lockdown, that is not frustration.
  2. If MCO or Total Lockdown makes it difficult to perform a contract, it is not frustration. The contract does not become impossible to perform.
  3. If it is a contract to deliver goods within a specific time to an area which is under lockdown, the contract is frustrated because it becomes impossible to perform by reason of the lockdown.
  4. However, if you are aware the area will be locked down in the next 2 days and have delayed in the delivery until 2 days later, you are not entitled to rely on frustration. Self-induced event is not frustration.
  5. If your contract provides for an alternative days or ways for delivery in the event of lockdown, lockdown is not an event of frustration. There are still alternative days or ways of delivery to complete the contract.

What is the effect when a contract is frustrated?

The contract is void. Whoever receives any advantage under the void agreement has to restore or make compensation to the other person. This is provided in Section 66 of the Contracts Act 1950. For example, if you are paid under a frustrated contract, you will have to pay back the money received.

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