Navigating Contract Performance Amid Geopolitical Disruption — A Practical Guide for Businesses Under Malaysian Law

When Global Events Hit your Contracts: What Malaysian Businesses Need to Know

The closure of the Strait of Hormuz in late February 2026, following military escalation between the United States, Israel, and Iran, has sent shockwaves through global trade. Energy prices have spiked, shipping routes have been thrown into disarray, and supply chains across Southeast Asia, including Malaysia, are under severe strain. For businesses operating under Malaysian law contracts, these disruptions raise an immediate and practical question: when performance of a contract becomes significantly harder, more expensive, or delayed by events entirely outside your control, what are your options?

This Update sets out the key principles that Malaysian businesses should be aware of and, more importantly, the practical steps they can take now to protect their commercial interests.

The Short Answer: Malaysian Law Sets a High Bar for Excuse from Performance

Businesses should be aware at the outset that obtaining relief from contractual obligations under Malaysian law is not straightforward. The principal statutory provision is section 57(2) of the Contracts Act 1950 (“section 57(2)“), which renders a contract void only where performance has become genuinely impossible or unlawful due to a supervening event that the promisor could not prevent.

The critical word is “impossible”. Malaysian courts have consistently declined to expand this concept to include situations where performance has merely become more difficult, more expensive, or commercially unviable. In Maxisegar Sdn Bhd v Silver Concept Sdn Bhd [2005] 5 MLJ 1, the Court of Appeal expressly rejected an argument that section 57(2) should be widened to encompass “impracticability”, holding that the provision is clear and refers only to impossibility and unlawfulness. The Federal Court in Pacific Forest Industries Sdn Bhd v Lin Wen-Chih [2009] 6 MLJ 293 restated the position firmly: a contract is not frustrated merely because it becomes difficult to perform; there must be such a significant change that the thing undertaken would, if performed, be a different thing from that contracted for.

In practice, this means that even if a geopolitical crisis has doubled your raw material costs or added weeks to your delivery timelines, you are very likely still bound by your contract. The 1997 Asian financial crisis provides a useful precedent: in Sentul Raya Sdn Bhd v Hariram a/l Jayaram [2008] 4 MLJ 852, the Court of Appeal held that the financial crisis merely made performance more onerous. It did not render the contract radically different, and the defence of frustration was accordingly unavailable. 

When Might the Doctrine Actually Apply?

Although the threshold is high, frustration can apply where an event truly destroys the foundation of the contract. The Contracts Act 1950 itself provides a directly relevant illustration: Illustration (d) to section 57 states that where A contracts to take in cargo for B at a foreign port and A’s Government afterwards declares war against the country in which the port is situated, the contract becomes void when war is declared. However, as Finelvet AG v Vinava Shipping Co Ltd (The Chrysalis) [1983] 2 All ER 658 makes clear, it is not a declaration of war itself but rather acts done in furtherance of the war that bring about frustration in a particular case.

The test applied by Malaysian courts, as articulated by the Court of Appeal in Guan Aik Moh (KL) Sdn Bhd v Selangor Properties Bhd [2007] 4 MLJ 201, requires three elements to be satisfied:

1. The event must be one for which the contract makes no provision — if the contract allocates the risk, the allocation governs;
2. The event must not be self-induced — a party cannot rely on its own act or default; and
3. The event must render performance radically different from what was originally undertaken — the court must find it practically unjust to enforce the original promise.

If any one of these elements is absent, section 57(2) does not apply. 

Beware the Consequences if Frustration does Apply

Businesses should also appreciate that frustration is a blunt instrument. Where it applies, the contract becomes void automatically and immediately — it is not suspended or adjusted but brought to an end. The consequence under section 66 of the Contracts Act 1950 is cross-restitution: any person who has received any advantage under the contract must restore it, or make compensation for it. In several cases, courts have ordered the refund of deposits paid under frustrated contracts (Lee Seng Hock v Fatimah bte Zain [1996] 3 MLJ 665, CA; Public Finance Bhd v Ehwan bin Saring [1996] 1 MLJ 331). Sections 15 and 16 of the Civil Law Act 1956 supplement this framework by providing a more equitable basis for adjusting the parties’ positions upon frustration. In particular, sums paid are recoverable and sums payable cease to be payable under a frustrated contract, reflecting the principle against unjust enrichment.

The starkness of this outcome was highlighted recently in Chong Yuong Wee v Menteri Perumahan Dan Kerajaan Tempatan [2025] 1 CLJ 111, where the High Court observed that, absent the temporary legislative relief introduced during the COVID-19 pandemic, the pandemic as a force majeure event would have frustrated the underlying housing contracts under section 57(2), with the result of cross-restitution, purchasers returning houses in exchange for a refund of all monies paid. The court described this as a “lose-lose situation” that was “mutually undesirable” for all parties. This underscores a critical point: even where frustration is theoretically available, the commercial consequences of automatic avoidance may be far worse than the disruption itself. 

So What Should Businesses Actually do?

Given that Malaysian law provides only narrow and commercially severe relief, the real answer for most businesses lies not in the statute books but in their contracts. Below are the key practical steps that businesses should consider. 

Review your existing contracts now. 

If your business is affected by the current disruption, the first step is to pull out your contracts and check what protections, if any, they contain. Look for force majeure clauses, hardship provisions, material adverse change mechanisms, and any provisions that deal with delay, cost escalation, or supply chain interruption. The scope of any such clause will be critical: force majeure clauses are construed according to their precise wording, and relief will only be available if the event in question falls within the clause’s defined scope. A clause that lists specific events such as “war”, “government action”, or “trade embargo” but omits references to shipping route closures or sanctions may not cover the present situation. Malaysian courts construe force majeure clauses strictly, and the burden rests on the party invoking the clause to prove the event falls within the scope and has caused prevention or material hindrance of performance.

Comply strictly with any notice and procedural requirements. 

Many force majeure and similar clauses require the affected party to give notice within a specified period, to demonstrate that the event has caused the inability to perform, and to take steps to mitigate the impact. Failure to comply with these procedural requirements can defeat an otherwise valid claim for relief.

Do not assume you are excused — keep performing where you can. 

Given the high threshold under Malaysian law, businesses should proceed on the assumption that they remain bound by their contracts unless performance has become genuinely impossible. Continuing to perform (even if only partially or with delay) while engaging the other party in discussions is almost always preferable to unilaterally stopping performance and hoping the doctrine of frustration will come to your rescue.

Engage the other party early and negotiate in good faith.

Where the disruption does not meet the strict threshold for frustration — and in most cases it will not — the most practical course of action is often to approach the other party and seek a mutually acceptable commercial solution. This may involve agreeing to revised delivery timelines, price adjustment mechanisms, alternative sourcing arrangements, or temporary suspension of certain obligations. A negotiated outcome will almost always be commercially preferable to the all-or-nothing consequences of frustration.

For new contracts, build in proper protection.

Going forward, businesses should not rely on the general law for protection against disruption. Tailored contractual provisions offer far greater certainty and flexibility. Key provisions to consider include:

1. Broadly drafted force majeure clauses that specifically list the types of events relevant to your business — including geopolitical conflicts, sanctions, shipping lane closures, port restrictions, government orders, and supply chain disruptions — rather than relying on generic boilerplate language. Force majeure clauses can take a variety of forms and must be construed in light of the precise words used and the nature and general terms of the contract.

2. Hardship or material adverse change provisions that provide for renegotiation or price adjustment where performance has not become impossible but has become substantially more burdensome. Such provisions are not implied under Malaysian law and must be expressly agreed upon.

3. Clear procedural frameworks covering notice requirements, evidence of impact, mitigation obligations, and defined timelines for response and resolution.

4. Graduated consequences rather than a binary choice between full performance and termination – consider providing for suspension, extension of time, cost-sharing, and renegotiation as intermediate steps.

5. Governing law and dispute resolution clauses that are suited to the commercial relationship and that provide an efficient mechanism for resolving disputes should they arise.

In construction, for example, standard forms such as the Pertubuhan Akitek Malayasia (PAM) Contract 2006 typically allow extensions of time for specified events but do not adjust price unless expressly provided; aligning price-adjustment mechanisms with time-relief provisions is essential where imported inputs or shipping routes may be disrupted.

If your contracts are cross-border, consider a Malaysia-seated arbitration clause administered under the Asian International Arbitration Centre (AIAC) Arbitration Rules 2026, and ensure that the governing law of the contract and the arbitration agreement are consistent. Malaysian courts take a pro-arbitration stance and will generally stay court proceedings in favour of arbitration under section 10 of the Arbitration Act 2005. Where the seat is Malaysia, and there is no contrary choice, Malaysian law is typically presumed to govern the arbitration agreement, a position now reflected in recent amendments. Malaysia’s status as a New York Convention state also supports reliable cross-border enforcement of awards.

The Bottom Line

The current geopolitical crisis is a reminder that disruption is not an aberration but a recurring feature of global commerce. Malaysian law, through section 57(2), provides a safety net, but it is a narrow one, available only where performance has become truly impossible or unlawful, and its consequences are severe and inflexible. For most businesses, the practical reality is that their contractual rights and obligations during a crisis will be determined not by the general law but by the terms of the contract itself.

The best time to address disruption risk is before it materialises. Businesses that invest in well-drafted force majeure, hardship, and risk-allocation provisions and understand the limitations of the statutory framework will be far better positioned to navigate the current crisis and those that follow.

For regional dispute resolution matters, please see Rajah & Tann Asia’s Regional Dispute Resolution Practice for more information.