LEGAL IMPLICATIONS TO CONTRACTS DURING THE COVID 19 MOVEMENT CONTROL ORDER PERIOD?


  1. Possible release from performance in the form of force majeure provision
  2. Is Covid-19 falls within the ambit of force majeure clause?
  3. Whether the non-performance was unforeseeable and beyond the control of the parties?
  4. Whether the performance has been hindered or impeded by the event?
  5. Party who successfully relies on such clause is entitled to suspend the time for performance during the MCO period.
  6. Whether the contract can be terminated unilaterally?
Following the sharp increase in the number of Covid-19 cases in Malaysia, the Government of Malaysia had declared the imposition of nationwide Movement Control Order (“MCO”) effective from 18 March 2020 (“MCO period”). As a result, parties to a contract are beginning to feel the effect for not being able to perform its obligations under their respective agreements. This article will narrow its considerations to how Covid-19 may interact with the contractual rights of the parties together with the related remedies to relieve a party from performing its obligations amid Covid-19.
It is well established in the law of contract that a contract or any Sale and Purchase Agreement (“SPA”), once signed by both parties is a legally binding contract. The parties are obligated to adhere to the terms and conditions of the contract and to perform their contractual responsibilities as set out in the agreement. This principle was enumerated in the case of Subramanian v Retnam [1966] 1 MLJ 172 and was recently upheld in the case of Capital Stitch Industry Sdn Bhd & Anor v Jubileei Sdn Bhd [2018] 1 LNS 1850.
However, following the implementation of MCO, all the government and private premises are ordered to be closed except for the entities engaged in essential services. Thus, the restrictions and limitations arising from the Covid-19 thereto have caused difficulties to many of the contracting parties who are struggling to meet their contractual obligations.
As such, the relevant question is how could one look at the contract for relief?
The answer is it depends on the terms of the agreement and the relevant facts and merit of each case. More often than not, the relief from non-performance will be found in the contract itself in the form of force majeure provision or any provisions that carry the same effect to it, for example the clauses that contains “termination due to force majeure” or “no fault termination from both contracting parties”.
A force majeure provision is a clause that relieves the parties from performing their contractual obligation in the event of unforeseeable occurrences. A party who is able to claim relief for a force majeure event will be entitled either to terminate the contract with no liability on the non-performance or to suspend the time for performance, but this will depend on the language of the provision.
In order to trigger the application of force majeure clause, a few specific factors must be taken into consideration by the defaulting party: –

  1. Is Covid-19 falls within the ambit of force majeure clause? One may have to carefully look at the specific wording in the force majeure clause. Some clauses are drafted broadly and provide a laundry list of events that constitute force majeure. Whilst some clauses contain catch-all provisions such as “governmental actions or regulations”, “act of God” or “beyond the parties’ reasonable control”. Since the outbreak is a relatively new phenomenon, it is unlikely that the event of the outbreak and the MCO will be explicitly referred to in the force majeure clause but under any of these broader provisions, such clauses would highly likely be wide enough to cover the current outbreak.
  2. Whether the non-performance was unforeseeable and beyond the control of the parties? Since the outbreaks or occurrences of past epidemics such as SARS, swine flu (H1N1) and ebola, it may be arguable that emerging virus outbreak is no longer constitutes as an unforeseeable event. However, one may argue that the extent of the nationwide MCO is unforeseeable considering this measure was never-before-seen in the Malaysian history.
  3. Whether the performance has been hindered or impeded by the event? The defaulting party will have to establish the causal link of Covid-19 and its inability to perform. A likely scenario would be the imposition of MCO which is to curb the spread of Covid-19 has made it impossible for the parties to timely perform under the contract due to the inability to deliver or receive the relevant documents under the contract from all the parties concerned as all the government and private agencies necessary to facilitate the completion of SPA or performance of a contract such as the land registry, town council, Inland Revenue Board, the property developer’s office or other relevant authorities are ordered to be closed.


WHETHER CONTRACTUAL OBLIGATIONS OF PARTIES CAN BE SUSPENDED DURING THE MCO PERIOD?
For contracts that contain a force majeure clause, depending on the wording of the force majeure provision itself, the party who successfully relies on such clause is entitled to suspend the time for performance during the MCO period. This would mean all the compliance dates or completion date stated in the contract therein are extended by the period of a valid suspension. Parties often include time periods during which the contract will be suspended and if the force majeure event prolongs than the set period, any party is entitled to terminate the contract unilaterally by way of notice to the other party.
In the event there is no such right available to the parties in the clause, the defaulting party will have to look to other provisions of the contract. If the contract does not provide any such right, it may in certain circumstances be possible at the request of the defaulting party, the other party given his consent to the suspension of such contractual obligation during the MCO period. This approach was approved by the Federal Court in the case of Yong Toi Mee & Anor v Malpac Capital Sdn Bhd & Anor [2013] 6 MLJ 453 whereby the court held that a contract that has been suspended by mutual agreement of the parties, the time for performance is also thereby suspended until the suspension of the contract has been lifted by either of the party.
WHETHER THE CONTRACT CAN BE TERMINATED UNILATERALLY IN THE ABSENCE OF CONTRACTUAL PERFORMANCE?
The general rule is that the failure of one party to perform its contractual obligation as set out in the agreement would constitute a fundamental breach of contract and thereby rendering termination of contract by the other contracting party as accordance to s.40 of Contracts Act 1950. However, if the defaulting party successfully proves that the downstream consequences of Covid-19 falls within the scope of the force majeure clause, the defaulting party will not be liable for breach of contract. In such circumstances, a premature claim for breach of contract may render the defaulting party to bring a claim for damages for unlawful termination of the contract.

WHAT IF THERE IS NO FORCE MAJEURE CLAUSE IN MY CONTRACT OR SPA?
In the absence of express provisions in the contract, the court are typically unwilling to imply a force majeure clause into the contract. This can be seen in the case of Bank Pembangunan Malaysia Berhad V. Pesaka Technologies Sdn Bhd [2019] 1 LNS 412 whereby the court rejected the defaulting party’s claim for force majeure on the basis that the contract does not contain any express provision to this effect.
In such circumstances, the defaulting party may consider asserting his defence under the doctrine of frustration. The doctrine of frustration is found in s.57(2) of Contracts Act 1950 where it stated that the act will become unlawful or impossible after the contract is made, the contract shall then be deemed as void.
For frustration of purpose to excuse performance, the requirement of which is enunciated in the case of Guan Aik Moh (KL) Sdn Bhd & Anor v. Selangor Properties Bhd [2007] 3 CLJ 695; [2007] 1 MLRA 434 which subsequently adopted by the Court of Appeal in the case Of Big Industrial Gas Sdn Bhd v. Pan Wijaya Property Sdn Bhd & Another [2018] 9 CLJ 1 whereby the court held that:
“First, the event upon which no provisions have been made in contract. If provision has been made, then the parties must be taken to have allocated the risk between them. Second, the event relied upon by the promisor must be one for which he or she is not responsible. Put shortly, self-induced frustration is ineffective. Third, the event which is said to discharge the promise must be such that renders it radically different from that which was undertaken by the contract. The court must find it practically unjust to enforce the original promise. If any of these elements are not present on the facts of a given case then s.57 does not bite.”
Further, as per Abdul Malik bin Ishak JC in Ooi Yoke In (f) & Anor v. Public Finance Berhad [1993] 2 CLJ 464; [1993] 1 AMR 734, at p. 742 whereby he states:
“the doctrine of frustration is to be confined to very narrow circumstances, the reason being, I think, that commercial bargains should not be lightly avoided or brushed aside merely upon a change of circumstances.”
These case laws show that a very high threshold must be met before a contract will be considered to be frustrated. Thus, party who wishes to seek for frustration of contract would have the difficulty to prove the impossibility of performance due to Covid-19 or nationwide MCO as a very few circumstances will render performance to be impossible especially for situation involving virus outbreak and the MCO.
WHAT IS THE CONTRACTUAL POSITION OF A PARTY IF ONE CANNOT RELY ON A FORCE MAJEURE CLAUSE OR OTHER LEGAL OPTION?
Unless the party is able to come into an agreement to vary the terms of the contract, it is likely to be in breach of contract. This may allow the other party to terminate the contract and/or seek damages or other contractual remedies.
WHETHER THE ADJUSTMENT OF PURCHASE PRICE IS ALLOWABLE IN LIGHT OF THE OUTBREAK WHICH RESULTS DECLINE IN PROPERTY MARKET PRICES?
Unlike some of the Commercial contracts, SPA is a fixed-price contract that doesn’t give the parties the right to price adjustments. Thus, unless it is expressly stated otherwise in the contract, no adjustment of purchase price is allowable without mutual consent.
WHAT SHOULD WE DO IF WE ARE IN THE MIDST OF NEGOTIATING A NEW SPA?
New buyer will want to carve out from the standard force majeure clause and ensure the following is covered in the provision itself: –
  1. Wording such as “epidemic”, “pandemic” and “outbreak” as well as the governmental acts such as “quarantines”, “lock-downs” or “MCO” to be included into the list of force majeure events;
  2. The parties’ rights and remedies upon the occurrence of a force majeure events such as the entitlement to suspend performance and the right to terminate after a specified period of time has elapsed; and
  3. A clear procedure to effect the force majeure provision.
CONCLUSION
While force majeure clauses can be useful to the affected party to disclaim its liability, it is however unpredictable in the sense that the efficacy of such clause is highly fact specific and depends on the terms and conditions of the contract, governing law and factual circumstances. Thus, it is advisable for the parties to evaluate the contract in its entirety to determine the relief available in the context of Covid-19 and its downstream effects and consequences.