Force Majeure vs. Change of Circumstances: Rebalancing the Bargain

When an external event disrupts a contract, Malaysian lawyers rely on the strict doctrine of frustration or a force majeure clause. In contrast, the Chinese Civil Code provides a more flexible statutory mechanism, the “Change of Circumstances” doctrine, which allows courts to modify contract terms to restore fairness. Understanding this shift from the common law’s “all or nothing” approach to the civil law’s “rebalance and continue” philosophy is essential for managing long-term cross-border agreements.

The Malaysian Position: Contractual Precision and Statutory Frustration

In Malaysia, force majeure is not defined by statute and exists only through contractual agreement. Without a force majeure clause, parties seeking relief from unforeseen events must rely on the doctrine of frustration under Section 57 of the Contracts Act 1950.

The threshold for frustration in Malaysia is high. Courts require proof that circumstances have changed so fundamentally that performance would be radically different from what was agreed. Section 57(2) of the Contracts Act 1950 states that a contract becomes void when the act promised becomes impossible or unlawful. Destruction of the subject matter or a change in law-making performance, illegal, are classic examples. However, commercial hardship, such as increased costs or reduced profitability, does not suffice. As confirmed in Pacific Forest Industries Sdn Bhd v Lin Wen-Chih [2009], a contract does not become frustrated merely because it becomes difficult or more expensive to perform. If a deal becomes a “bad bargain” due to external factors, Malaysian courts generally expect parties to bear that risk.

China: The Dual Track of Force Majeure and Hardship

The 2020 Chinese Civil Code provides two paths for relief, distinguishing physical impossibility from economic hardship. The first path, Force Majeure (Article 180 and Article 590), covers unforeseeable, unavoidable, and insurmountable objective situations. As in Malaysia, this exempts parties from liability for non-performance.

The second path is the Doctrine of Change of Circumstances under Article 533. Based on the provided Chinese legal texts, this applies when a fundamental change occurs that:

1. Was unforeseeable at the time of contracting.
2. Is not considered a commercial risk inherent to the trade.
3. Makes the continued performance of the contract manifestly unfair to one party or prevents the realisation of the purpose of the contract.

Importantly, Article 533 applies even if performance remains technically possible. For example, if a global supply chain collapse triples the cost of a fixed-price delivery, a Malaysian court would likely hold the seller to the original price. In contrast, a Chinese court may view this as an imbalance that requires a remedy.

The Power of Judicial Modification

The key difference for practitioners is the available remedy. In Malaysia, a frustrated contract is automatically terminated and becomes void. If a force majeure clause is triggered, remedies are usually limited to suspension or termination as specified in the contract.

Under Article 533, courts or arbitral tribunals may modify the contract. If negotiations fail, a party may petition the court or an arbitral tribunal to adjust contract terms to restore fairness. This may include:

• Adjusting the unit price to reflect new market realities.
• Extending deadlines to account for logistical delays.
• Modifying the volume of goods to prevent the total insolvency of a supplier.

Malaysian courts view contract modification as an impermissible rewriting of the bargain. In contrast, Chinese courts consider it a necessary application of good faith to preserve the contractual relationship rather than allow it to fail.

Practical Implications: The Mandatory Duty to Renegotiate

Under Article 533, an affected party in China must request renegotiation in good faith before seeking judicial intervention. This is a critical procedural requirement. In Malaysia, unless a force majeure clause specifically requires a negotiation period, there is no general statutory duty to renegotiate an unfavourable deal.

For Malaysian practitioners, when a Chinese counterparty invokes hardship, it signals the start of a legally mandated renegotiation phase. Ignoring such a request or refusing to negotiate reasonably may be viewed by a Chinese court as a breach of the duty of good faith. This could expose the Malaysian party to liability for damages if the court finds that the failure to reach a fair adjustment resulted from the other party’s refusal to cooperate.

Conclusion: Beyond the Force Majeure Clause

When handling transactions governed by Chinese law, a well-drafted force majeure clause is not sufficient. Practitioners must also consider the statutory safety net provided by Article 533.

In Malaysia, the strategy is defensive, with practitioners drafting to protect against total failure. In China, the approach must be adaptive, as courts may intervene to rebalance the contract if external conditions change significantly. Success in these transactions requires moving beyond strict adherence to contract clauses and understanding the civil law’s commitment to long-term commercial fairness.

The article was first published on LinkedIn.