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COVID-19: Frustration & Contracts of Employment



Introduction


Ramifications of an unfair dismissal claim can be far-reaching and in some cases, catastrophic to business. In Malaysia, some 100 Malindo Airways staff have reportedly filed a representation with the Industrial Relations Department for unfair dismissal after their contracts were prematurely terminated during the movement control order (MCO). Under Section 20 of the Industrial Relations Act 1967, an employee who is dismissed or who considers their dismissal to be without just cause or excuse may file a written representation to the director-general of industrial relations within 60 days of the date of their termination or during the period of their notice of dismissal.


Courts are generally reluctant to find that an employment contract has been frustrated, largely because the doctrine allows employers to sidestep statutory protections afforded to employees. Nevertheless, unprecedented times call for unprecedented measures, and frustration may become a useful tool in certain employers’ fight against the disruption caused by the COVID-19 pandemic. A key question is whether an employer can rely on the doctrine of frustration in the absence of a force majeure clause in the employment contract. In this article, the author will focus on Malaysian jurisprudence in this regard.


What is the Force Majeure clause?


A force majeure clause expressly anticipates that there may be a supervening event beyond the control of the parties, which might affect the performance of a contract. This could be a change of factual circumstances such as a pandemic causing staff to be ill and unable to work or a legal change such as the government’s guidance on isolation, social distancing and shielding.


A typical force majeure clause may be worded as follows:


“A party to this contract shall not be liable for any losses and damages caused by any delay or for the consequences of any delay in performing any of its obligations under this contract if such delay is due to any acts of god, strikes, fire, pandemics, riot, strikes, lockouts or by any other causes which are beyond its reasonable control, and it shall be entitled to a reasonable extension of the time for performing such obligations.”


It is rare for a force majeure clause to be drafted into a contract of employment but not impossible. Therefore, careful consideration of the contract and any associated incorporated (or other) documents should be undertaken. It is more common in commercial contracts to include epidemic or pandemic also. It is very unusual to see these clauses in employment contracts unless the employee is senior in the organisation. Such clauses often require notice to be given by the other party as soon as possible of the difficulty or impossibility of performing the contract.


What is the doctrine of frustration?


Employers would want to rely on common law doctrine of frustration as there is no dismissal in law when the employment contract has been frustrated as decided in Raj Joseph Appadorai v Linde Malaysia Sdn Bhd [2019] 2 ILR 449. In the absence of a force majeure clause in the employment contract, the affected party may have the option to rely on the doctrine of frustration. In comparison with force majeure where it is an agreement as to how outstanding obligations should be resolved upon the onset of a foreseeable event, the doctrine of frustration concerns the treatment of contractual obligations from the onset of an unforeseeable event (see Glahe International Expo AG v ACS Computer Pte Ltd [1999] 2 SLR 620).


The doctrine of frustration is embodied in Section 57 of the Contracts Act 1950 where a change in circumstances has rendered the contract impossible to perform. Specifically, section 57(2) of the Contracts Act 1950 states, "[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."


The doctrine of frustration has a similar effect as a force majeure clause, in the sense that it relieves a party from his contractual obligations if an intervening event has disrupted the continued performance of the contract. However, the Courts are generally reluctant to disturb the bargain between the parties and thus, circumstances resulting in the frustration of a contract are narrowly construed. The Federal Court in Pacific Forest Industries Sdn Bhd & Anor v Lin Wen-Chih & Anor [2009] 6 MLJ 293 held that a contract is not frustrated merely because its performance has been rendered more difficult to perform.


When a contract is frustrated, it ends automatically, by operation of law and is rendered a nullity, thus discharging the parties from further obligations under it. The parties cannot elect to keep it alive. There is neither a dismissal on the part of the employer or a resignation on the part of the employee. Accordingly, the employee: a) cannot claim unfair dismissal; b) is not entitled to any notice or payment in lieu. This consequence is more drastic as compared to a force majeure event, which only suspends the performance of the contract for the period that the event subsists, unless the contract provides for automatic termination or is terminated by the counterparty exercising its right to do so under the contract.


Can an employer rely on the doctrine of frustration?


The elements in determining whether a contract has been frustrated was set out by the case of Guan Aik Moh (KL) Sdn Bhd & Anor v Selangor Properties Bhd [2007] 4 MLJ 695:


1. The event relied on must be one for which no provision has been in the contract. If a provision has been made, then the contract must govern;


2. The event relied upon must be one for which the party is not responsible for. Self-induced frustration is ineffective; and


3. The event must be such that renders it radically different from that which was undertaken by the contract. The court must find it practically unjust to enforce the original promise under the contract.


Arguably, the first and second elements can be satisfied in light of the implementation of the MCO due to the COVID-19 pandemic. Nevertheless, it may be difficult to prove that the event has rendered the performance to be radically different or impossible under the contract. If the employees are able to work from home, it is unlikely that an employer will be able to rely on the doctrine of frustration during this period. This would not render the contract entirely impossible to perform.


In the Hong Kong case of Li Ching Wing v Xuan Yi Xiong [2004] 1 HKLRD 754, it was argued by a tenant that his tenancy agreement was frustrated during the outbreak of SARS, as he was not allowed to stay in the premises for 10 days due to an isolation order issued by the Hong Kong Department of Health. The District Court held, inter alia, that the tenancy agreement was not frustrated because the isolation order was only for a short duration in the context of the lease at issue, i.e. a period of 10 days out of a 2-year tenancy, and such event did not significantly change the nature of the contractual rights and obligations from what the parties could reasonably have contemplated at the time of the execution of the tenancy agreement.


In the case of V Kandiah v. The Government Of The Federation Of Malaya [1952] 1 MLJ 97, the court accepted that the employee’s contract of service with the Government of the Federated Malay States was terminated by reason of frustration due to the occupation of Malaya by the Japanese Forces for 3 and a half years. Similarly, in the case of Sathiaval Maruthamuthu v. Shell Malaysia Trading Sdn Bhd [1998] 1 CLJ Supp 65, the doctrine of frustration of contract was applied as the period of non-performance by the employee was at least 2 years given his detention at the rehabilitation centre.


Hence, with respect to COVID-19, for individuals and businesses that wish to rely on frustration, the main hurdle to overcome would be the ability to demonstrate that the changes to the nature of contractual obligations are permanent, and not just temporary or transient. Most effects of the COVID-19 such as illness, quarantine, travel restrictions, shuttering of businesses and schools, or working from home, seem temporary. However, if time is of the essence for the performance of a fundamental term in a contract, and such performance is utterly prevented by the pandemic, the parties may have a case.


In contrast to normal employment contracts, particularly for the aviation industry, it is argued that COVID-19 has rendered both employers and employees physically or commercially impossible to fulfill the obligations set out under the contract or it changed the nature of the contractual obligation from what was initially agreed upon under the contract.The COVID-19 pandemic has had a significant long-term impact on the aviation industry due to travel restrictions and a slump in demand among travelers. Significant reductions in passenger numbers have resulted in flights being cancelled or planes flying empty between airports, which in turn massively reduced revenues for airlines and forced many airlines to lay off employees or declare bankruptcy.


It is thus submitted that the case of Li Ching Wing could be distinguished here because the changes to the nature of contractual obligations in the aviation industry are not just temporary or transient as it is hard to predict when will the travel restrictions be lifted globally. Also, the contract is now extremely expensive to perform due to changes in economic conditions. Thus, COVID-19 has rendered long-term frustrating events. Following the cases of V Kandiah and Sathiaval Maruthamuthu, it is submitted that COVID-19 pandemic prevents employees in the aviation industry from working, so arguably the doctrine of frustration can be applied in this case. Whilst frustration might not be available this may result in redundancy issues.


Conclusion


Establishing a contract has been frustrated is not an easy task. In order for employers to successfully defend an unfair dismissal claim under the IRA 1967, employers will have to prove that the dismissal is “with just cause and excuse”. As such, alternative ‘defences’ to a COVID-19-related unfair dismissal claim would be to argue that such employees were fairly dismissed by way of capability, redundancy or SOSR, depending on the circumstances.


The Industrial Court also takes into account “procedural fairness”, so it is also entirely possible that an employer may have good grounds for dismissal but still lose the unfair dismissal case because the dismissal was procedurally unfair or against the rules of natural justice. Accordingly, it would still be advisable to follow a fair process before ending an employee’s contract. Hopes should not be solely pinned on the doctrine of frustration.





Written by: Chong Wei Li


**Acknowledgment: Wei Li would like to thank her CLP Contract law lecturer, Mr. Tan Kong Hun for giving her valuable feedback on the article.


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