The World Health Organization (WHO) has recently declared Covid-19 a pandemic, which governments all over the world are now struggling to deal with. It is anticipated that the collateral damage and the final economic cost in the aftermath will be massive. Some countries may default in debt obligations and many businesses will face bankruptcy. Some have even predicted a world-wide recession. What this means is that in the coming months, courts all over the world will be asked to adjudicate on force majeure clauses.
To contain the spread of Covid-19, governments have imposed different models of social distancing. Some countries like China had resorted to extreme draconian responses while on the other end, some have merely issued advisories. Most have responded through legislation and decrees. Some have force of law while others don’t.
The Malaysian Government has imposed a movement control order (“MCO”) which entails inter alia, the closure of non-essential businesses (as stated in Schedule 2 of the Prevention and Control of Infectious Diseases Regulations 2020), restriction of travel in and out of the country and restriction of movements along with social distancing measures from 18 March 2020 to 14 April 2020 (extended from 31 March 2020).[please refer to the Prevention and Control of Infectious Diseases (Measures within the Infected Local Areas) Regulations 2020 and Prevention and Control of Infectious Diseases (Measures within the Infected Local Areas) Regulations 2020 (No.2)]
As a result, a party affected by the MCO may find it onerously difficult if not impossible to perform its obligations under ongoing contracts. In the absence of a force majeure clause in the contract, the party may find itself in breach of contract.
What is a Force Majeure Clause?
A force majeure clause (“FM Clause”), if applicable, operates to relieve a party from having to perform its contractual obligation(s) on the occurrence of a disrupting force majeure event.
Typically, the FM clause would firstly specify which events constitute force majeure events and secondly the ensuing consequences that follows. A force majeure event must first fall within the wording of the FM Clause for it to apply. In light of the Covid-19 pandemic and the resulting MCO declared by the Government, a FM Clause which defines force majeure events with terminology such as ‘infectious disease’, ‘epidemic’, ‘pandemic’, ‘outbreak’, ‘global health emergency’ could apply to Covid-19, while the MCO could fall under ‘government action’.
The FM Clause if applicable, would then allow the affected party to postpone or suspend the performance of the contract for a period of time and if by the expiry of the agreed time, the force majeure event still persists, the party may proceed to terminate the contract.
It is important to consider the precise wording of the FM Clause as a party may be required to give formal notice of the force majeure event before the party can rely on the same. In such a case, failure to give notice would be fatal.
If the language in the FM Clause refers to the force majeure event “preventing” performance, then the mere fact that it becomes difficult or more expensive to perform the obligation is irrelevant. The event must have the effect of actually preventing or rendering performance impossible. On the other hand, if the language used in the FM Clause refers to a lesser standard such as the use of “hinders” “impedes” ”impairs” then it may well be that a party can successfully invoke the FM Clause by merely showing that the performance has become onerous.
Essentially, whether a party can rely on the FM Clause depends on the factual matrix of the case and the interpretation of the precise scope of the FM Clause. In the absence of a FM Clause, the only question which arises is whether the contract is frustrated. In Malaysia, the concept and conditions of frustration is embodied in Section 57(2) Contracts Act 1950. If applicable, the consequences are more drastic as the contract is ended permanently. A party seeking to argue that a contract is frustrated must be careful as there are no clear guidelines under the contract and wrongfully doing so could amount to a repudiation of the contract.
In conclusion, the economic downturn in light of the pandemic could persist if not worsen. Therefore, businesses ought to carefully manage their contractual obligations by reviewing the FM Clause and overall rights under their contracts.
This article is not intended as legal advice. If you have any queries or require legal advice, please contact Justin Chong at justincck@jmcvc.com or through any of our general lines.