By
Ranjan Chandran, Partner (Commercial & Construction Department)
Chandni Anantha Krishnan, Associate (Commercial & Construction Department)
Harneshpal Karamjit Singh, Associate (Commercial & Construction Department)
From 2020 2 MLRA i Judgment Express.
Ever since the World Health Organization (“WHO”) declared Coronavirus (“COVID-19”) a pandemic on 11 March 2020 and the Malaysian Government enforced the Movement Control Order (“MCO”) pursuant to the Prevention and Control of Infectious Diseases Act 1988 and the Police Act 1967 from 18 March 2020, many common business owners have been concerned on the tough times that lie ahead in fulfilling their contractual obligations and/or contractual covenants.
Many business owners due to not being able to operate their business with the Pandemic Cvid-19 and MCO may breach of contract for failure to comply with Terms and Conditions on :-
This will result in unnecessary problems for the common business owner who will face termination of their contracts and Court actions filed by the other party to claim loss and damages with interest and costs.
There may be breached of contracts that may end up with the consequences of the common business owner being adjudged a Bankrupt or Winding-Up of their companies.
What are the possible options open for the common business owner?
It is a contractual term agreed by parties to the contract to deal with extraordinary situations that may arise over which, the said parties have little or no control and thus would prevent the performance of the contract.
It covers unforeseen events - wars, acts of god, certain strikes that will excuse a party from its duty to perform the contract."
It will depend on how the Malaysian Courts interpret the Force Majeure clause as we have no precedent case in Malaysia.
Business owners will have to read their contract terms with a fine-tooth comb to see if there is a Force Majeure clause in their agreement and what is the scope and extent it covers. It must be noted that Force Majeure cannot be implied into a contract.
Business owners must then ascertain if the Force Majeure clause covers:-
The business owner will have to see if the List of events of Force Majeure are intended to be non-exhaustive so as to encompass a Broader List and Pandemic situation such as COVID-19.
The Business owner may argue that Covid-19 Pandemic is an Act of God beyond the control of man to justify the shield of the Force Majeure clause.
However this will depend on the Courts as the opposing view will be that, it is presumptuous to confidently state that the COVID-19 Pandemic was ‘An Act of God’ when there is no tangible evidence to that effect.
This is once again an arguable issue as there are no precedent case authorities in Malaysia.
The Business owner may argue that the measures taken by the Government such as forced quarantines, stay at home orders, restricted movements, travel bans, local and foreign imposed, have all brought his business to a complete closure and standstill not generating any income and a valid reason for the impossibility of complying with contractual terms of a contract warranting the protection of Force Majeure clause.
Business owners must be prepared for the opposing view that MCO is not a good or valid reason to rely on Force Majeure, since Government imposed the MCO in the best interest of the people of the country, their health and safety of paramount consideration to check the spread of the Pandemic.
It is the Authors respectful views that no affirmative views can be expressed as this Pandemic is unprecedented and there are no case references in Malaysia. Much will depend on the discretion as exercised by the Learned Judge of the Court judiciously, with the paramount intention of ensuring justice and fairness.
If the Force Majeure clause applies, then there may be the following remedies:-
Contracting parties must hereinafter be more prepared and ensure that Force Majeure clauses should cover a wider latitude and the unavoidable, unforeseeable and irresistible events like an Epidemic, Pandemic, communicable disease outbreak and communicable virulent diseases.
If the Force Majeure clause is water-tight, then our Malaysian Courts will be obliged to give effect to it, applying the Literal Construction principle of the Contract law.
If there is an ambiguity in the Force Majeure clause, then our Malaysian Courts may apply the ‘Contra Proferentum’ Rule to strictly construe and interpret as against the interest of the business owner who is seeking to rely upon it.
Whilst Force Majeure is a creature of contract as explained earlier herein, Frustration is a creature of statute/common law.
A word of caution in that the Force Majeure clause in a contract of a business owner may oust the operation of the Doctrine of Frustration, as parties to the contract have already determined as to what are the specific events which constitute the risk of the Frustrating event.
The relevant section in our Contracts Act 1950 is Section 57(2) of the Contracts Act 1950 which reads as follows:- “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.”
The Malaysian Courts have formulated a three (3) elements test for the Doctrine of Frustration to apply as follows:
If the common business owner intends to rely on the COVID-19 Pandemic and the MCO as an event that declares the contract Frustrated then that event must frustrate the contract altogether and not merely affect the performance temporarily.
As an example, if a contract stipulates a duration of twenty four (24) months to fulfill an obligation of a party, and that party will now require additional time of thirty six (36) months, then by reason of the COVID-19 and MCO, the other party may be held obliged to grant the extra time towards completing the contract. In such an instance there will be no Frustration.
Frustration results in the termination of the contract and the terms of the contract cease to operate.