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COVID-19 & MCO: Its Effects On Contractual Performance

April 3, 2020

In response to the COVID-19 pandemic, a nationwide movement control order came into force beginning 18 March 2020. Many businesses are left in perplex dealing with time-sensitive contracts. This article aims to shed some light on the effects of the COVID-19 pandemic to the inevitable disrupt in contractual performances.

Movement Control Order (MCO)

The MCO is in place as a measure to combat the surge of COVID-19 in the country. As many are aware, the MCO was initially in place for an experimental period of a fortnight, taking effect from 18 March until the 31 March 2020. However, on 25 March 2020, the MCO period was extended until 14 April 2020 in view of the rising number of new COVID-19 cases by the day. Malaysians are also warned to brace themselves for potential further extension of the MCO depending on the pandemic’s situation in the coming weeks.

Force Majeure Clauses

Corporations may want to take a look at their force majeure clauses which often exist to protect parties from the inability to fulfil contractual duties due to supervening events. The operation of a force majeure clause depends on its construction. Some circumstances normally specified are ‘acts of God’, ‘acts of government’, ‘war’ and ‘riots’ (see Malaysia Land Properties Sdn v Tan Peng Foo [2014] 1 MLJ 718 (CA)). Most force majeure clauses would even insert a catch-all provision such as ‘events beyond the control of parties’ or ‘any other events’.

However, the catch-all provision may only save you if its interpretation remains within the nature of the preceding specific circumstances. In legal terms, this principle is known as ejusdes generis. For instance, if say ‘inclement weather’ is the only supervening event spelt out as a force majeure event, one may not read ‘explosions’ into it because the two are different in nature (see Araprop Development Sdn Bhd v Leong Chee Kong & Anor [2008] 1 MLJ 783 (CA)). In the current COVID-19 calamity, look out for events such as ‘outbreak’, ‘pandemic’, ‘epidemic’ or ‘contagious diseases’ in your force majeure clauses.

Malaysian courts require for a party seeking to rely on a force majeure clause to prove that the circumstances he is facing is protected by the particular clause. Additionally, he must also show that all reasonable steps have been taken to avoid the operation of the force majeure clause or to mitigate its results. Accordingly, it is advisable that anyone who seeks to alter his or her contractual obligations via force majeure exhausts the alternative means of completing the job, reducing delay and/or minimising loss: finding other suppliers and alternative methods of delivery even if they involve a higher cost (see Malaysia Land Properties Sdn Bhd v Tan Peng Foo [2014] 1 MLJ 718 (CA)).

In addition to that, causation plays a role in force majeure. He who seeks to rely on force majeure must prove that had it not for the supervening event, the contractual obligation would have been duly performed and honoured. This principle is widely known as the but-for test (see English case Classic Maritime Inc v Limbungan Makmur Sdn Bhd [2019] EWCA Civ 1102; Seadrill Ghana Offshore Ltd v Tullow Ghana Ltd [2018] EWHC 1640 (Comm)).

Doctrine Of Frustration

Alternative to force majeure, one may also wish to explore whether frustration applies. What does this mean and what does it entail?

Generally, when a change of circumstances arises after a contract is executed, and such change renders the contract to be legally or physically impossible to perform, the contract is said to be frustrated. Under section 57(2) of Contracts Act 1950, a frustrated contract results to termination.

A higher threshold is required in order to establish frustration for the simple commercial reason that courts would generally seek to enforce contracts rather than dismissing them. A contract would not be frustrated merely because it turns out to be difficult and/or onerous to perform. An ideal circumstance must be such that through the default of none, a contractual obligation has become incapable of being performed and/or the circumstances would render the contract radically different from its original intention (see Tai Kim Yew & Ors v Sentul Raya Sdn Bhd [2004] 4 MLJ 227 (HC); Ramli bin Zakaria v Government of Malaysia [1982] 2 MLJ 257 (FC)).

A useful guideline was propounded by the Federal Court in Guan Aik Moh (KL) Sdn Bhd & Anor v Selangor Properties Bhd [2007] 4 MLJ 201 where the bench laid down several ingredients to successfully establish frustration:

  1. The supervening event must be one for which no provision has been made, such that the parties must not have considered risk allocation between them.

  2. The event must not be due to the promisor’s action. In other words, self-induced frustration is ineffective.

  3. Performance of promise is now radically different from what was agreed upon.

However, we shall keep in mind that some contracts may only be partially frustrated – this is where a contract is not wholly impossible to perform just because a portion of the subject matter ceases to exist (see Wong Siew Choong Sdn Bhd v Anvest Corporation Sdn Bhd [2002] 3 AMR 2554 (CA) – where the court ruled that the sales and purchase of a piece of land was not frustrated by the compulsory acquisition of a small portion of the land). In such instance, the court may either direct for specific performance and/or award compensation.

It shall be noted that a force majeure argument, if successfully invoked, would apply to the exclusion of the statutory frustration provided for by section 57(2) of the Contracts Act 1950 (see Tekno Kota Sdn Bhd v Setapak Heights Development Sdn Bhd [2004] 1 AMR 61 (HC)).

Force Majeure vs Frustration – Which One Offers The Best Relief?

Of the two – force majeure clause and doctrine of frustration, which one fits the shoe? Well, that would depend on the desired outcome. Conceptually, the operation of force majeure and frustration are different.

Force majeure allows for discharge of contract or some other form of relief on a contingency without necessarily terminating the contract. It is great in a sense that it provides a more nuanced response to supervening events. For instance, it may temporarily suspend a party’s duty to perform a contract or it may even allow for an extension of time. To simply put, the contract is not automatically brought to an end (see Sri Alam Sdn Bhd v Newacres Sdn Bhd [1997] 1 MLJ 287 (CA)).

On the other hand, frustration entails a stringent and one-faceted eventuality – that is termination. This, however, may be desirable if the performance of the contractual obligation is radically different from what was agreed upon. In such a case, the legal consequences that reasonably follow would be those stipulated in Section 66 of the Contracts Acts 1950 as well as Section 15 of the Civil Law Act. The former lays out the obligation of person to restore any advantage received under a void contract or one that has become void, whereas the latter provides for the adjustment of rights and liabilities of parties to frustrated contracts.

In deciding for the appropriate route to engage upon, a wise preliminary step would be to take a look at other relevant provisions in your contract – extension of time, essence of time, consequence of delay, termination clause or the likes of it. For all you know, the repercussion to the COVID-19 outbreak is actually spelt out in other limbs of your contract. It is best to read your contract in its entirety.

This alert is a summary of the article written by Dayana Najwa (Dispute Resolution Associate) and Khaw Tzer Shen (Dispute Resolution Trainee), which was recently published in the Malay Mail and the Edge.

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