The World Health Organization (WHO) had on 11 March 2020 officially declared COVID-19 a worldwide pandemic. Subsequently, the Government of Malaysia issued a Restriction of Movement Order to take effect from 18 March 2020 pursuant to the Prevention and Control of Infectious Disease (Measures Within the Infected Local Areas) Regulation 2020 (collectively "the Order") in response to the spike in COVID-19 cases in Malaysia to control and minimise the outbreak. The impact of COVID-19 has adversely impacted global economies and Malaysia is no exception. During this critical and unprecedented times, companies may face difficulties in fulfilling existing contractual obligations due to business operation disruptions caused by the Order, not to mention supply chain interruptions and trade restrictions across the globe. In this brief write-up, we will be exploring the impact of the Order due to COVID-19 on fulfilling existing contractual obligations by examining the force majeure provision in commercial contracts under Malaysian law.
What is Force Majeure?
A force majeure clause generally refers to unforeseeable events or circumstances that would render the parties’ obligations under the contract impossible to perform. A force majeure clause is not implied by law and has to be expressly incorporated into a contract by agreement of parties. The definitive wording of the clause is vital to specify events where performance is “prevented”, “hindered”, or “delayed”. Inclusive terms such as “acts of God”, "pandemics", “natural disasters”, “outbreak of diseases”, "quarantine", “act of government or state”, “government intervention”, “restrictions” and “blockade” if explicitly specified in the force majeure clause would allow contracting parties to temporarily suspend their contractual obligations.
A party seeking to invoke force majeure bears the burden to show that a supervening event has occurred that is beyond his reasonable control, that will cause delay or inability to comply with the time-sensitive obligations under the contract.
Does COVID-19 constitute a Force Majeure event?
Whether the COVID-19 outbreak and/or the Order can be considered as a force majeure event depends entirely on the words and scope of the force majeure clause in the contract. The law provides that an agreement must be construed by the words used in the contract. In the case of CIMB Bank Bhd v Anthony Lawrence Bourke & Anor [2019] 2 MLJ 1, the Federal Court held that the court is not empowered to improve upon the instrument which it is called upon to construct.
A force majeure clause will be read as a whole together with the other provisions in the contract. In any event the court would consider the underlying purpose of the contract and see whether parties have taken any steps to mitigate the situation before allowing the defaulting party to invoke the force majeure clause (Crest Worldwide Resources Sdn Bhd v Fu Sum Hou dan Satu Lagi [2019] MLJU 512, HC).
Due to the recent outbreak, it is very unlikely that a contract would explicitly list COVID-19 as one of the eventualities. However it is possible for the contract to specifically mention terms such as “disease”, “epidemic”, “pandemic”, “global health emergency” or “outbreak” which may qualify to include the COVID-19 outbreak as a force majeure event. Whilst terms such as “government restrictions”, “government intervention”, “restrictions” and “blockade” may also be sufficient to include the Order as a force majeure event in the contract. On the other hand, words such as “acts of God” are arguably insufficient, as an act of God is an accident due to natural phenomenon and exclusively without human intervention which could not have been avoided.
Other Considerations
In deciding whether the COVID-19 and/or the Order constitutes a force majeure event, other considerations must be taken into account:
A. Foreseeability
The occurrence of a force majeure event must be unforeseeable at the time of conclusion and execution of the contract. Any events which could have been reasonably avoided or overcome will be excluded.
B. Causal Link and Impact
A party who wishes to invoke the defence of force majeure must show the link between the non-performance and the force majeure event. He must show that the performance of his obligation as stipulated in the contract has been rendered impossible or delayed as a result of the occurrence of the force majeure event.
C. Notice
Any party relying on the force majeure clause would be required to serve a notice notifying the other party of the occurrence of such event. Failure to fulfil the prerequisites and procedures set out in the contract may result in the affected party not being able to rely on such provision.
D. Mitigation
It is also important for a party seeking to rely on the COVID-19 outbreak as a force majeure event to show that he has taken reasonable steps to prevent, or at least mitigate the effects of the epidemic, where possible.
Absence of Force Majeure Clause
If there is no express force majeure clause in the contract, parties may examine if there are any other contractual provisions that have a similar effect. In the event of absence of force majeure clause, parties may resort to the doctrine of frustration of contract, which applies by operation of law.
Conclusion
In view that the impact of COVID-19 continues and remains uncertain, it is advisable for companies to review applicable force majeure provisions under their respective contracts to ascertain whether the current COVID-19 outbreak and/or the Order may constitute a force majeure event.
Should you have any queries in relation to the above, please feel free to reach out to us at info@kdj-law.com
Written by,
Christie Ding
Associate
Corporate Commercial