Maritime Disruption in the Strait of Hormuz: Key Legal Implications for Malaysian Businesse

2. Key Legal Issues Under Malaysian Law

(A) Force Majeure – Contractual Mechanism

Under Malaysian law:

• Force majeure is not implied — it must be expressly provided in the contract
• Its scope depends entirely on the wording of the clause

Practical implications:

• War, hostilities, or “acts of God” may fall within force majeure only if expressly included
• General clauses may not cover:
  • Increased cost
  • Difficulty or delay alone

Courts in Malaysia typically adopt a strict interpretation:

• A party must show:
  • The event falls within the clause
  • It directly prevents or delays performance
  • Reasonable steps to mitigate were taken

Key risk:

• Clients may assume geopolitical conflict automatically excuses performance — this is often incorrect.

(B) Doctrine of Frustration – Contracts Act 1950

Where no force majeure clause exists:

• Section 57(2) of the Contracts Act 1950 applies:
  • A contract becomes void when performance becomes impossible or unlawful.

High threshold:

• Must be radical change, not mere inconvenience
• Increased cost, delay, or commercial hardship is not sufficient

• Frustration may apply where:
  • Shipping route becomes legally or physically inaccessible
  • Government restrictions make performance unlawful
• But will NOT apply where:
  • Alternative routes exist (even if more expensive)
  • Performance is still possible with delay

Malaysian courts generally follow English law principles:

• Frustration is narrowly applied.

(C) Insurance Obligations & Risk Allocation

From a legal perspective:

• Shipping and trade contracts often require:
  • Maintenance of valid marine and war-risk insurance
  • Compliance with insurer conditions

Current risk environment:

• War-risk premiums may increase significantly
• Insurers may:
  • Impose exclusions
  • Withdraw cover
  • Trigger “notice of cancellation” provisions

Legal consequences:

• Failure to maintain insurance may constitute:
  • Breach of contract
  • Loss of financing arrangements

(D) Delay, Liquidated Damages & Breach

If shipments are delayed:

• Parties remain liable unless:
  • Protected by force majeure
  • Contractually excused

Exposure includes:

• Liquidated damages (LAD)
• Claims for late delivery
• Termination rights

Under Malaysian law:

• Courts will enforce contractual timelines unless legally discharged

(E) Sanctions & Regulatory Compliance

Given the conflict:

• Increased risk of:
  • Secondary sanctions
  • Prohibited trade routes or counterparties

Malaysian companies must:

• Ensure compliance with:
  • UN sanctions regimes
  • Banking and trade restrictions

Breach may result in:

• Contract invalidity
• Banking/payment disruption