Trade War Tariffs: Grounds For Frustration And/Or Force Majeure Under Malaysian Law?

Author:  Muhammad Azly Haziq Sazali & Omar Saifuddin Abdul Aziz

Trade War Tariffs: Introduction

On 2 April 2025, so-called as “Liberation Day” by the President of the United States, President Trump announced a series of protectionist trade measures aimed at reshoring American industries. Indeed, the United States has implemented a 10% baseline tariff on imports from nearly all countries. On top of this, higher "reciprocal" tariffs have been applied to specific countries with which the US has significant trade deficits or alleged by the United States to practise policies deemed anti-competitive. Countries that wish to reduce Trump’s tariffs would either need to reduce exports to the U.S. or purchase enough American goods to balance their trade,[1] and align sufficiently with the US on economic and national security matters.[2]

President Trump’s sentiment aside, as pointed out by commentators, ultimately it is the American consumer who will bear the cost of these tariffs, and these tariffs will only raise prices for American consumers, drive up inflation, reduce demand for goods, and bring about the risk of a recession.[3] Indeed, as it is the US economy which is at the epicentre and bearing the full brunt of the trade war, the probability of it experiencing a recession within the next six to twelve months has risen to nearly 50%.[4]

In light of the market turmoil and backlash globally and domestically, and despite initially digging in, President Trump on 9 April 2025 had declared a full three-month suspension of all “reciprocal” tariffs—except those targeting China—an astounding turnaround from a president who had previously maintained that such tariffs were there to stay.[5] However, the 10% universal tariff on all imports into the United States remains in effect, and the threat of higher “reciprocal” tariffs still looms once the 90-day pause ends. The Malaysian Home Front

The United States has hit Malaysia with a 24% “reciprocal” tariff on imported goods into the United States, which is lower compared to Vietnam’s 46%, Thailand’s 36%, Indonesia’s 32%, and Taiwan’s 32%, but still higher than Singapore’s 10% and the Philippines’s 17%.[6] Affected sectors include furniture, textiles, electrical and electronic devices, machinery and equipment, optical and scientific equipment, with foreseeable challenges in respect of supply chains, global demand and business operational costs.[7] [8] On the other hand, products such as semiconductors, wood products, copper and copper products, energy products, and pharmaceuticals, are exempt from the higher “reciprocal” tariffs for now. However, this situation is still subject to change, and future tariffs remain a possibility.[9] That said, the imposition of the tariffs has caused some Malaysian manufactured goods exporters to temporarily halt shipments to the United States while they await clarification on the financial impact of the new tariffs.[10] This raises the question: when government-imposed tariffs or trade restrictions suddenly and significantly increase the cost of performing contractual obligations, can the affected party invoke frustration and/or force majeure? Doctrine of Frustration in Malaysia vis-à-vis the imposition of tariffs

Section 57(2) of the Malaysian Contracts Act 1950 provides for the doctrine of frustration:

“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.”

In Malaysia, a contract is only discharged by frustration if the changed circumstances make the performance of the contract something radically different from that originally undertaken.[11]

Note that in the Federal Court case of Pacific Forest Industries Sdn Bhd & Anor v. Lin Wen-Chih & Anor [2009] 6 CLJ 430; [2009] 6 MLJ 293, it was held that:

“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 impossible to perform, as it is not frustration. Neither can he plead frustration because the terms of the contract make it difficult to interpret. If it cannot be performed or becomes unlawful to perform, then the party who is to perform his part of the bargain can plead frustration. The doctrine of frustration is only a special case to discharge a contract by an impossibility of performance after the contract was entered into. A contract is frustrated when subsequent to its formation, a change of circumstances renders the contract legally or physically impossible to be performed.”

Thus, in other words, just because a contractual obligation is more financially burdensome to perform, does not mean that it is radically or fundamentally different. Indeed, such is the stance taken in Sentul Raya Sdn Bhd v Hariram a/l Jayaram [2008] 4 MLJ 852, where it was held that although the 1997 financial crises made it more onerous and expensive to perform the contractual obligation, it nonetheless did not render it radically different, thus the defence of frustration could not be successfully raised in that case.

Consequently, it may be difficult to invoke frustration in relation to the tariffs imposed on the mere basis that the contractual obligation is not commercially viable. Force Majeure Clauses in Malaysia vis-à-vis the imposition of tariffs

Malaysian law does not prohibit parties from including force majeure clauses in their contracts—that is, provisions allowing certain external events to suspend or excuse contractual performance entirely. Whether an event qualifies as force majeure, whether it must be unforeseeable, whether its effects must be permanent, and the extent of its impact are all matters that will depend on how the clause is interpreted in the context of the contract as a whole. However, a party relying on a force majeure clause must prove the facts bringing the case within the clause.[12]

Emphasis must be made that under Malaysian law, force majeure must be expressly set out in the contract as the courts interpret such clauses strictly. In other words, the defence of force majeure would be inapplicable where a contract makes no provision for it. When a contract is in writing, the intention of the parties must be found within the four walls of the contractual documents as was upheld by the Court of Appeal in the case of BIG Industrial Gas Sdn Bhd v Pan Wijaya Property Sdn Bhd and Another Appeal [2018] 3 MLJ 326.

Moreover, the courts have refused to imply force majeure clauses into a contract where the contract is silent on the same. In the case of Muhammad Radhieddeen bin Abdul Khalid v Saujana Triangle Sdn Bhd [2017] MLJU 950, the High Court cited with approval the Singapore case of Magenta Resources (S) Pte. Ltd. v. China Resources (S) Pte. Ltd. [1996] 3 SLR 62 which held that there can be no general rule as to what constitutes a situation of force majeure. Whether such force majeure situation arises, and where it does arise, the rights and obligations that follow, would all depend on what the parties have provided for in their contract. Conclusion

In conclusion, while both the doctrines of frustration and force majeure offer potential pathways for excusing contractual performance in Malaysia, they come with stringent criteria and require precise language within the contract. Parties must meticulously draft their agreements to clearly outline the conditions under which these doctrines, if any, may be invoked. Failure to do so could result in the inability to rely on these defences when unforeseen circumstances arise. Consequently, careful consideration and legal consultation during the drafting process are essential to safeguard against future uncertainties.

Disclaimer:

This newsletter is for informational purposes only and does not constitute legal advice. Please consult with a qualified legal specialist for advice tailored to your specific situation. _________________________________

[1] https://www.bharian.com.my/bisnes/lain-lain/2025/04/1380580/tarif-trump-ini-yang-perlu-anda-tahu-implikasi-kepada-malaysia (in Malay)

[2] https://www.thestar.com.my/business/business-news/2025/04/07/trumps-tariffs-what-is-the-impact-on-malaysia [3] https://www.bharian.com.my/bisnes/lain-lain/2025/04/1380580/tarif-trump-ini-yang-perlu-anda-tahu-implikasi-kepada-malaysia (in Malay) [4] https://www.thestar.com.my/business/business-news/2025/04/07/trumps-tariffs-what-is-the-impact-on-malaysia [5] https://edition.cnn.com/2025/04/09/business/reciprocal-tariff-pause-trump/index.html [6] https://www.thestar.com.my/business/business-news/2025/04/07/trumps-tariffs-what-is-the-impact-on-malaysia [7] Ibid [8] https://theedgemalaysia.com/node/750922 [9] https://www.thestar.com.my/business/business-news/2025/04/07/trumps-tariffs-what-is-the-impact-on-malaysia [10] https://theedgemalaysia.com/node/750922 [11] Ramli bin Zakaria v Government of Malaysia [1982] 2 MLJ 257, FC. [12] Intan Payong Sdn Bhd v. Goh Saw Chan Sdn Bhd [2004] 1 LNS 537; [2005] 1 MLJ 311