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Covid-19 and its implications on commercial agreements in Malaysia

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published on 25 February 2021 | reading time approx. 6 minutes

Geetha Salva, Advocate & Solicitor, Salva & Associates in Association with Rödl & Partner

 

The concept of force majeure and the doctrine of frustration has gained a lot of attention since the spreading of covid-19. The relief of the force majeure clause and the doctrine of frustration in commercial agreements needs to be assessed on a case by case basis to ensure its applicability during the Movement Control Order imposed by the government of Malaysia.

   

  

Force Majeure

A force majeure event refers to the occurrence of an event which is outside the control of a party to a contract, and prevents the party from performing or completing its contractual obligations under the contract. It is common for commercial agreements to have a force majeure clause, and the clause commonly features the following:

  • The description of the occurrence which would constitute a force majeure event; and
  • The consequences of the said force majeure event.

 
Parties who are affected and unable to perform their obligations under a contract due to unforeseeable events may seek to rely on force majeure clause in a contract to avoid liability. However, the ability to claim relief for a force majeure event depends on the express terms and wording of the clause, i.e. the force majeure clause has to be expressly stated in the contract.

 
In the context of the current pandemic, specific words such as “pandemic”, “epidemic”, “plagues”, “medical outbreaks”, “national emergency”, “government orders”, or phrases with broad definitions, which are beyond the control, or reasonable control of the parties affected should be stipulated in the contract. Without such specific wordings, it is rather difficult for a party to argue that covid-19 and the Movement Control Orders are force majeure events. Furthermore, force majeure clauses are strictly construed by the courts.

 
The strict approach taken by courts in enforcing a force majeure can be seen in the case of Global Destar (M) Sdn Bhd v Kuala Lumpur Glass Manufacturers Co Sdn Bhd (2007) MLJU 91, whereby it was held that a depressed economy does not fall within the category of “other circumstances” in a force majeure clause.

 
The above decision suggests that despite a party’s financial position being severely affected by covid-19 or the imposition of the MCO, it is unlikely that the court would accept such occurrence to be a force majeure unless they were specifically provided for in the contract.

 
The effect of the force majeure clause is usually provided in the clause itself. Examples of possible effects are the release of the parties from performing their obligations under the contract and suspension for a period of time followed by termination after the expiry of the period.

 
Apart from the wording of the force majeure clause, there are other relevant matters to be considered, such as are there any conditions attached to invoking the clause, or is there a requirement to mitigate the effects of the force majeure event. In case there is no force majeure clause, parties would have to then rely on the doctrine of frustration of contract.

 

Frustration of Contracts

The doctrine of frustration is provided in section 57 of the Contracts Act 1959, whereby it is stated that ‘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’, i.e. it discharges a party from its contractual obligations.

 
Parties may rely on section 57, provided the below requirements are fulfilled (Pacific Forest Industries Sdn Bhd v Lin Wen Chih (2009) 6 MLJ 293):

  • event must have been one for which no provision has been made in the contract;
  • the event that occurred must not have been caused by either party; and
  • the event which is said to discharge the contractual obligation must be such that it radically differs from what was undertaken by the contract. The court must find it practically unjust to enforce the original promise.

 
As the word “impossible” in section 57 is not defined, case laws have provided some guidance. In Hong Leong Bank Bhd v Tan Siew Nam & Anor (2014) 5 MLJ 34, the Court of Appeal acknowledged in addition to circumstances of physical or literal impossibility to perform a contract, frustration may arise where the performance of an act
“may be impracticable and useless from the point of view of the object and purpose which the parties had in view and if an untoward event or change of circumstances totally upset the very foundation upon which the parties rested their bargain, it can very well be said that the promisor found it impossible to do the act which he promised to do”.
The question whether a contract would be ‘impossible” to perform depends on the circumstances and evidence presented to the courts.

 
Whether covid-19 and the Movement Control Order would render a contract frustrated depends on the contractual obligation. A party who seeks to rely on these would have to prove that it was beyond the control of the parties to a contract, and that such occurrence could not be anticipated when entering into to the contract.
Taking the example of a tenancy contract, some may take the view that since the MCO has caused business premises to be closed, the purpose of a tenancy would be suspended by the lockdown. However, a counter argument would be that considering the period of the MCO being relatively short (one to two months) compared to the usual term of a tenancy (two to three years), it is likely not to be regarded as an event of frustration.

 
In a supply chain scenario where there is no force majeure clause, the question to be asked is whether the MCO has made it impossible for delivery or performance to be made in time, and whether time is of essence to the contract. If it is, then parties may have a frustrated contract and both parties are discharged from performance of the contract.

 
The doctrine of frustration cannot be relied on just because it has become more difficult or expensive for the obligation to be performed. A contract becomes frustrated when following to its formation, a change of circumstances renders the contract legally or physically impossible to be performed.

 

Temporary Measures for Reducing the Impact of Coronavirus Disease 2019 (covid-19) Act 2020

The Temporary Measures for Reducing the Impact of Coronavirus Disease 2019 (covid-19) Act 2020 (“covid Act”) was gazetted and came into force on 23 October 2020. The Government through the Temporary Measures for Reducing the Impact of Coronavirus Disease 2019 (covid-19) (Extension of Operation) Order 2020 has extended the applicability of Part II of the covid Act until 31 March 2021. The other provisions of the covidAct will be in force for two years from 23 October 2020, or in accordance with the date and period in the relevant parts of the covid Act.

 
The aim of the covid Act is to provide parties some form of temporary relief from legal obligations as well as to protect parties who may be affected by the measures taken under the Prevention and Control of Infectious Disease Act 1988 to overcome the covid-19 pandemic.

 
Parties whose contractual obligations have been affected by the Government imposed Movement Control Order (currently MCO 2.0), should be aware of section 7 of the covid Act. Section 7 provides the inability of any party or parties to perform their contractual obligation under a contract which falls under the scope of the Part II Schedule of the covid Act due to the measures taken under the Prevention and Control of Infectious Disease Act 1988 to control or prevent the spread of covid-19 (such as MCO 2.0) shall not give rise to the other party or parties exercising their rights under the contract.

 
The categories of contracts specified under Part II Schedule are as follows:

  1. Construction work contract or construction consultancy contract and any other contract related to the supply of construction material, equipment or workers in connection with a construction contract;
  2. Performance bond or equivalent that is granted pursuant to a construction contract or supply contract;
  3. Professional services contract;
  4. Lease or tenancy of non-residential immovable property;
  5. Event contract for the provision of any venue, accommodation, amenity, transport, entertainment, catering or other goods or services including for any business meeting, incentive travel, conference, exhibition, sales event, concert, show, wedding, party or other social gathering or sporting event, for the participants, attendees, guests, patrons or spectators of such gathering or event;
  6. Contract by a tourism enterprise as defined under the Tourism Industry Act 1992 and a contract for the promotion of tourism in Malaysia
  7. Religious pilgrimage-related contract;´
     
    The above categories of contracts specified in Part II Schedule was amended under Temporary Measures for Reducing the Impact of Coronavirus Disease 2019 (covid-19) Act 2020 (Amendment of Schedule) Order 2020. The amendments came into operation on 1 January 2021 whereby includes the two categories below:
  8. Hire-purchase agreement as defined under Hire-Purchase Act 1967 or leasing contract, that has been entered into by micro enterprises, B40 or M40 class of persons as specified in the Inland Revenue Board of Malaysia database, as the case may be, for the following vehicles:

    a) motor vehicles as classified under Section 5 of the Road Transport Act 1987;
    b) goods or public service vehicle
    i. in relation to Peninsular Malaysia, has the meaning assigned to it in the Land Public Transport Act 2010; or
    ii. in relation to Sabah, Sarawak and Federal Territory of Labuan, has the meaning assigned to it in the Commercial Vehicles Licensing Board Act 1987; or
    c) tourism vehicle
    iii. in relation to Peninsular Malaysia, has the meaning assigned to it in the Land Public Transport Act 2010; or
    iv. in relation to Sabah, Sarawak and Federal Territory of Labuan, has the meaning assigned to it in the Tourism Vehicles Licensing Board Act 1999; and
  9. Credit sales contract under the Consumer Protection Act.

   

Conclusions and Recommendations

Companies that are about to enter into a contractual relationship should take into consideration the current pandemic and the impact it has. They are encouraged to identify and consider from the start the effect of scenarios such as a Movement Control Order imposed by the government would have on the contractual obligations and the scope of the force majeure clause.

 
As for existing contracts, we encourage the contracts to be reviewed to consider whether there is a force majeure clause and the applicability of such clause or whether the doctrine of frustration can be relied on. It is also necessary to check whether there are any limitations or time lines to be observed upon invoking the force majeure clause.

 
Furthermore, companies should ascertain whether the covid Act is relevant to their contractual obligations and seek legal advice for an assessment.

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