Impact of Pandemics (like COVID-19) on Contractual Rights and Obligations
On 11 March 2020, the World Health Organisation (“WHO”) finally declared the latest coronavirus (“COVID-19”) a worldwide pandemic, affecting 200countries and causing tens of thousands of deaths to-date.
Due to the surging numbers of COVID-19 cases in Malaysia since the start of 2020, the Malaysian Government issued a “Movement Control Order” (“MCO”) from 18th March 2020 until 14th April 2020 in order to curb the spread of the disease in the country. All government departments and private businesses have been ordered to shut down during MCO period, except for essential services (eg. water, electricity, energy, telecommunications, postal, transportation, food supply). As a result of the MCO, many businesses are likely to face or are already facing difficult questions over their contractual obligations, liabilities, and what rights they have in light of this unprecedented global catastrophe.
A contractual relationship arises when there are two or more parties enter into an agreement (in writing or verbally) wherein each party is required to perform its duties and/or obligations based on the terms of the agreement. For example in a contract for supply of timber, the contractual relationship arises between the supplier and the purchaser wherein the supplier is required to deliver timber in a satisfactory quality to the purchaser whilst the purchaser is to make payment to the supplier at the agreed price. Other examples of contracts include service agreements, employment contracts and construction contracts.
If a contractual relationship exists, the next question would be how the implementation of the MCO and/or an outbreak like COVID-19 affect the relationship. Can one party rely on the “force majeure” clause to relieve itself from performing its obligations under the contract or even put an end to the contract?
How does a “Force Majeure” Clause work?
Force majeure means the occurrence of an event or circumstances that is not reasonably foreseeable by the parties and it is beyond the control of the parties, the occurrence of which causes the performance of a contract to be obstructed, hindered, prevented and/or impeded.
It is worthwhile to note that force majeure is a creation of contract and not of common law therefore there must be an express provision of force majeure in the contract and/or agreement (Finmark Consultants Ptd. Ltd. v Development & Commercial Bank Berhad). Additionally, the party who attempts to rely on a force majeure clause bears the burden to prove that the occurrence of the event or circumstances had prevented, hindered and/or impeded the party from performing the contract, that the non-performance was due to circumstances beyond its control and that there were no reasonable steps that it could have taken to avoid or mitigate the event or its consequences (Intan Payong Sdn Bhd v Goh Saw Chan Sdn Bhd).
Is COVID-19 a “Force Majeure” event?
The question of whether COVID-19 qualifies as a force majeure event is largely dependent on the wordings and/or the language used in the force majeure clause of the contract. In general, there are three different common approaches.
(a) Listing of Specific Events
The first method used is the listing of specific events that fall within the ambit of the force majeure clause. These may include events such as war, terrorism, earthquakes, hurricanes, acts of God, acts of government, plagues or epidemics. If the force majeure clause is very explicit, attention will need to be paid to the specific words of the clause to determine whether the MCO and/or COVID-19 would be included.
(b) Setting out Broad Criteria or Definition
In the absence of specific terms and/or definitions in the force majeure clause, parties should look out for broader phrases such as “events and/or circumstances beyond the reasonable control of the parties” as a saving provision.
(c) Combination of the above
This is the most common type of force majeure clause adopted – listing of specific events alongside general wordings.
In each approach, parties ought to verify how broad or narrow the force majeure clause was drafted. The Malaysian Courts have been generous in their interpretation to assist the parties who have encountered genuine issues beyond their control that affect and/or impede the performance of their contracts.
Effect or Remedy of a “Force Majeure” Clause
There are potentially two effects of triggering a force majeure clause: termination or suspension (which has the similar effect as an extension). The following provisions should be reviewed to determine how to exercise the clause and what entails from such exercise:
- Notification requirements
- Time limit to exercise
- Contract terminated or suspended
- Duration of suspension / extension (if applicable)
Absence of a “Force Majeure” Clause
In a situation where a force majeure clause is not present, the contract may instead be rendered void on the grounds of “frustration”, where a supervening event renders a contract legally or physically impossible to perform (s. 57 Contracts Act 1950).
However, it is crucial to point out that a contract is not deemed to be frustrated merely because it becomes difficult to perform – performance must have been rendered impossible (Pacific Forest Industries Sdn Bhd & Anor v Lin Wen Chih & Anor).
In other words, in order to void the contract due to “frustration”, the party must be able to prove that the implementation of MCO and/or outbreak of COVID-19 resulted in the contract being impossible to perform. For example, delivery of construction materials to site during the MCO period or where production of goods requires raw materials from a country that is under lockdown with no alternative source.
It must be emphasised that whether it is a force majeure event or a situation of frustration, the terms of the contract play a crucial role. Parties ought to be prudent as insistence on terminating and/or suspending a contract where such right does not exist or arise could potentially backfire and cause more harm than good.
This article was contributed by Karina Lee and Hynn Choo of C.C.Choo, Hazila & Teong.
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