Covid-19 Outbreak – An Excuse for Non-Performance of Contract?

ARC News   •   March 18, 2020

First reported in Wuhan, China in December 2019, Covid-19 is a respiratory illness that causes coughing, sore throat, fever and shortness of breath. As at the date of writing this article, Covid-19 has affected 170 countries with 208,172 confirmed cases and 8,272 death, prompting World Health Organization (WHO) to declare Covid-19 as a pandemic on 11 March 2020. As the virus continues to spread globally, many countries impose a drastic move such as a lockdown to curb the spread of Covid-19.

 

Similarly, Malaysia is not spare from the Covid-19 outbreak. With 790 reported cases and 2 deaths as at 18 March 2020, the Malaysian Prime Minister announced the first ever in Malaysia’s history, a Restriction of Movement Order (“RMO”) on 16 March 2020 which take effect nationwide on 18 March 2020 to 31 March 2020 to curb the outbreak of Covid-19.

 

How does Covid-19 and the RMO affect businesses in Malaysia?

 

Covid-19 has undoubtedly causing economy to slow down whereby many manufacturing plants are forced to temporarily shut down and travel industry is bombarded with unprecedented quantity of requests for cancellation of travel bookings. The RMO further escalated the pressure in the economy whereby most businesses in Malaysia (except essential services sector) are forced to close temporary and this instantly causes possible long-term financial implications and give rise to supply chain disruption. Question then arises – does the Covid-19 excuses non-performance of commercial contract?

 

The short answer is that it depends on the terms of the contract. Having said that, it is pertinent to determine if the contract contains a force majeure clause? Force majeure clause is commonly found in commercial contract to typically excuse a party to the contract from fulfilling its obligations under the contract in an unexpected circumstance such as war, lockout, labour strike, flood, fire or any events not within the control of a party. As the doctrine of force majeure is a principle derived from common law, there is no recognised meaning for this term under the Malaysian law. More often than not, the court will assess the wordings as stipulated in the force majeure clause to determine the intention of the contracting parties.

 

Following the above, it is apposite to ascertain if the force majeure clause is crafted in a limited or general manner. If the force majeure clause is crafted in a limited manner, there is a possibility of “pandemic” or “lockdown” not being categorised as force majeure events, hence imposing unnecessary obligations on a party to continue performing its responsibilities under the contract or exposing the party to unnecessary consequences for failing to fulfil its obligation under the contract. On the contrary, if the force majeure clause is crafted in a general manner to include any acts not within the control of the contracting party, it is plausible for the contracting parties to excuse non-performance of the contract.

 

Despite the foregoing, it is trite that a party seeking a relief under a force majeure clause to prove the facts bringing the case within the clause. Essentially, the party must prove the following:

 

  • the occurrence of the events as stated in the force majeure clause;
  • that the party has been hindered or prevented from performing the contract by reason of the event; and
  • that the non-performance was due to circumstances beyond its control and that there were no reasonable steps that he could have taken to avoid or mitigate the event or its consequence.

 

If a party seeking relief upon a force majeure clause is able to prove the above-mentioned requirements, it is highly probable that the party is able to seek a relief under the force majeure clause. Corresponding to the above, it is timely to revisit commercial contract(s) signed in light of the on-going Covid-19 global outbreak especially if any measures taken by the government affect the performance of a party under a contract.

 

This Article is co-written by Yeo Shu Pin (Partner) and Serene, Tee Jia Qing (Legal Executive) of Messrs. Afif Rahman & Chong

Disclaimer: Every attempt to ensure the accuracy and reliability of the information provided in this publication has been made. This publication does not constitute legal advice and is not intended to be used as a substitute for specific legal advice or opinions. Please contact the authors for a specific technical or legal advice on the information provided and related topics.

 

2020-03-24T18:45:43+00:00