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Covid-19, A Force Majeure situation in a contract?

 

 

The recent COVID-19 outbreak which has been declared a pandemic by the World Health Organization has been affecting lives, businesses, individuals and industries worldwide. In an effort to minimize the outbreak, the Government of Malaysia has on 16 March 2020 issued a Movement Control Order (“MCO”) which entails inter alia, closure of non-essential businesses, restriction of travel in and out of the country and restriction of movements throughout Malaysia from 18 March 2020 to 28 April 2020.

During this critical period, companies may or are facing various difficulties in fulfilling their existing contractual obligations, due to disruptions caused by the suspension of business operations and trade restrictions across the world. Due to the unforeseen circumstances arising from the Covid-19 outbreak this raises the issue of whether the current crisis may excuse or postpone the performance of contractual obligations. Thus, we shall consider whether force majeure clauses in commercial contracts and the related common law doctrine of frustration may be invoked in the context of the COVID-19 outbreak.

 

WHETHER COVID-19 OUTBREAK CAN BE CONSIDERED AS A FORCE MAJEURE EVENT IN A CONTRACT.

Given the unexpected nature of the outbreak, parties to commercial contracts may seek to invoke force majeure. A force majeure clause essentially is a clause that is intended to allow parties to deal with the consequences of an unforeseen event that is beyond the control of either party to the contract. It is a common feature in commercial contracts and will excuse a party from upholding their side of the agreement where circumstances beyond its control makes performance of the contract impossible by that party, thus protecting against liability for breach of contract and potential damages being payable. This could extend to matters such as allocation of costs, provide for suspension of the contractual obligations and in extreme cases it could even provide for termination of the contract.

The concept of force majeure in Malaysia is a creature of contract and is wholly dependent on the existence of an express force majeure clause in the relevant contract. Accordingly, whether delays or disruptions from the coronavirus epidemic are specifically covered as a force majeure event depends upon the interpretation of the relevant wording in the contract. Terms such as "epidemic", "outbreak of diseases" and "quarantine" spelt out in contracts would likely constitute a force majeure event. The same may be said for "Acts of God", "Acts of Government" or by general wording such as "other circumstance beyond the parties’ control"[1].

The availability of force majeure clause as an option will depend on the construction of the contract clause and the specific factual circumstances. Typically, a force majeure clause will provide a definition of the force majeure events which may be exhaustive or non-exhaustive. It will often lists examples which may or may not include “epidemic” or “pandemic” or sometimes it may refer to an emergency such as a state emergency, it will also require that the force majeure event must be beyond the reasonable control of the parties and it may then require that such event as being unforeseeable, unavoidable or irresistible or that the parties must not have been able to prevent its occurrence.

Other aspects to look at is that the force majeure event must make performance of the contract impossible not simply more difficult or more expensive or less profitable to perform. These are quite important as it will set out the threshold as to when the clause can be invoked.

Also, the force majeure event must not have been directly or indirectly caused by the party relying on the clause, which may include both willful and negligent acts or omissions by the party relying on the clause. If this is not expressly stated, then this may be a requirement that is implied into the clause. These are circumstances that will set out the threshold for determining whether the force majeure clause can be invoked.

Whether events arising from the COVID-19 pandemic and the imposition of the MCO by the Government of Malaysia are within the scope of a force majeure clause depends wholly on the wording of the clause. The Malaysian courts would first ascertain whether the specific type of event relied on by a party is listed or is otherwise described in the clause, such as, for example, “epidemic” or “pandemic” or “prohibitive governmental directive” or “government action or order”. The Malaysian courts would then look at the wider definition or criteria laid down in the agreement to determine whether the on-going pandemic and/or the imposition of the restrictive measures would enable one to rely on the force majeure clause to escape liability for non-performance. On the assumption that the Malaysian courts are satisfied that the COVID-19 pandemic and/or the imposition of restrictive measures trigger the force majeure clause, a party will be relieved from performance only if there were no reasonable steps which could have been taken to avoid or mitigate the event or its consequences.

The relief available would be dependent upon the wording of the applicable force majeure clause. Force majeure clauses can prescribe a range of remedies, including extensions of time, loss and expense, suspension of performance, termination of the contract and consequential provisions. In construction contracts, time-related risk is often allocated to owners in force majeure clauses but seldom cost-related risks. Ultimately, it depends on the construction of the applicable force majeure clause.

If a force majeure clause can be invoked, then you need to look at the requirements on how to do so and the most important step is issuing a written notice of the force majeure event to the other party. Typically, the clause would require that the written notice be given in a prescribed form and within a specified period. A party may arguably be precluded from invoking the clause if the notice is not given in accordance with the contractual requirements. Thus, it is important that such notice is issued accordingly if you intend to rely on the clause later.

Another point that is important is that the force majeure clause usually states that a party has to be prevented or hindered from performing the contract as a result. And so, the party seeking to rely on the clause would need to show causal connection between the force majeure event on the one hand and the inability to perform the contract on the other.

The other main factor that you might need to show is whether or not you have carried out any mitigation steps. The party relying on the force majeure event is required to take reasonable steps to avoid or prevent the occurrence of the force majeure event.  They may be required to mitigate its effects on the performance of the contract[2] and then to resume performance as soon as possible or as soon as the force majeure event is over. It may also require you to carry out alternative methods of performing the contract.

Finally, the other thing you need to look at is the outcome or consequences of invoking the force majeure clause. This would mean that performance of the contract is suspended for a short period of time often for the period of the force majeure event, but if the event carries on for some period of time for instance 6 months or 12 months it may be then possible to terminate the contract. All of that however depends on the actual terms of the contract.

 

WHETHER A PARTY CAN RELY ON THE CONTRACTS ACT 1950 IN THE ABSENCE OF A FORCE MAJEURE CLAUSE.

In the absence of a force majeure clause should an unforeseen event occurs, parties would then have to rely on common law, effectively they have to show that is has become impossible to perform their contractual obligation, to be excused from failing to meet their contractual commitment, the relevant legal doctrine is the doctrine of frustration.

If there is no force majeure clause in a contract, a party may try to invoke the doctrine of frustration under Malaysian law which provides relief when a change in circumstances occurs which renders the performance of the contract impossible or illegal[3].

In Malaysia, the doctrine of frustration is encapsulated in section 57(2) of the Contracts Act 1950 which provides 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.”

 

The contract becomes void if the performance of the contract becomes impossible or unlawful by reason of some intervening event which could not be prevented. If a contract is frustrated it will be deemed void[4] upon the occurrence of the frustrating event. However, the threshold for the doctrine of frustration to apply under Malaysian law is high, as the party invoking this doctrine needs to establish the following[5];

 

1. The event upon which the parties relies as having frustrated the contract must have been one for which no provision has been allocated in the agreement by the parties;
2. The party invoking the doctrine is not responsible for the event, it is not a self-induced frustration;
3. The supervening event must result in the performance of a contract being fundamentally different from what was originally undertaken in the contract.

 

If the contracting party is able to prove that the contract becomes void under section 57 (2) of the Contracts Act 1950, any person who has received any advantage under the contract is bound to restore it, or to make compensation for it, to the person from whom he received it[6].

 

Conclusion

The terms of the contract are important in determining whether the COVID-19 outbreak is to be a force majeure event. In order to seek reliance on a force majeure clause, a party will be required to demonstrate that the event of the force majeure was beyond control of the party, that it has taken reasonable steps to overcome or mitigate the event and its consequence, and that there are no alternate means for performing under the contract. However, the reasonableness of mitigation depends on a case to case basis and the subject matter of the contract. Further, in cases where a contract does not have an explicit clause on force majeure, there could be scenarios where parties may try to seek shelter under section 57(2) of the Contracts Act 1950. Hence, the legal consequence of the COVID-19 outbreak will have to be assessed on a case to case basis depending on the terms of the contract entered between the parties.

 

-Nadia Azreen Azizi-

[6] Section 66 of the Contracts Act 1950.Content goes here.

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