Force Majeure & LAD

Whether Covid-19 can be considered as a force majeure event under the force majeure clause, resulting in BICAS' inability to fulfill its contractual obligations, and thereby precluding the imposition of liquidated damages against BICAS?

Force Majeure

(a) Force majeure is a creation of contract. A force majeure clause generally refers to unforeseeable events that would render the parties’ obligations under the contract impossible to perform. In RHB Capital Bhd v Carta Bintang [2012] 10 MLJ 469, the court stated that: “force majeure clauses are clauses generally intended to include risks beyond the reasonable contract of a party.

(b) In essence, it frees both parties from liability or obligation when a force majeure event takes place. An effective force majeure clause usually contains two main components: (a) a description of what amounts to a force majeure event; and (b) the consequences of a force majeure event.

(c) In the context of the contract between BICAS and G

M, it is pertinent to note that the force majeure clause is an explicit contractual provision mutually agreed upon by the parties to address unforeseen situations, particularly those beyond their control, that could impede or thwart the execution of the contract.

(d) A force majeure clause is not implied by law and has to be expressly incorporated into a contract by agreement of the parties.

(e) 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.

Covid-19 / Force Majeure Event

(f) There is no blanket rule as to whether the Covid-19 outbreak can be considered a force majeure event. Whether the Covid-19 outbreak can be considered as a force majeure event depends entirely on the words and scope of the force majeure clause in the contract.

(g) 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.

(h) The contract may explicitly list terms like 'disease,' 'epidemic,' 'pandemic,' 'global health emergency,' or 'outbreak,' potentially qualifying the Covid-19 outbreak as a force majeure event. However, when no relevant event is expressly mentioned, interpretation of the clause is crucial to determine whether the parties intended such events to be covered. This hinges on whether the list of events was meant to be exhaustive or non-exhaustive. Without clear indications of a non-exhaustive list, it is challenging to argue that the omission of a specific event, such as an epidemic, implies an intention to exclude it from coverage.

(i) In order to successfully rely on a force majeure event, the party must prove that the occurrence of the event (Covid-19) has prevented, hindered or delayed him to perform his obligation under the contract.

(j) It must be shown the performance of his obligation(s) as stipulated in the contract has been rendered impossible as a result of the occurrence of the force majeure event and that such non-performance would not have become impossible but for the occurrence of the force majeure event.

(k) The mere occurrence of an event outside the reasonable control of the parties will not be sufficient for the force majeure clause to be applicable. Therefore, the force majeure clause will not be applicable if performance of the contractual obligations is not affected by the Covid-19 outbreak.

Mitigation

(l) Obligation to mitigate the effects of a Force Majeure event may include, "take reasonable steps", "to use 'reasonable endeavours"; "to take 'all reasonable endeavours"; "the prescribed mitigation steps" and whether such obligation is worded in the Force Majeure clause.

(m) In Intan Payong Sdn Bhd v Goh Saw Chan Sdn Bhd [2005] 1 MLJ 3115 the High Court held that "it is trite that a party relying upon a force majeure clause must prove the facts bringing the case within the clause. He must therefore prove the occurrence of one of the events referred to in the clause and that he has been prevented, hindered or delayed, as that case may be from performing the contract by reason of the event. He must further prove that his non-performance was due to circumstances beyond his control and that there were no reasonable steps that he could have taken to avoid or mitigate the event or its consequence".

Force Majeure Remedy

(n) Availability of remedies depend on terms agreed between the parties. Remedies in the force majeure clauses are construed according to the wording in the clause.

Temporary Measures for Reducing the Impact of Coronavirus Disease 2019 (COVID-19) Act 2020 [829]

(o) Act 829 came in force on 23 October 2020 and remained in force until 22 October 2022 - Temporary Measures for Reducing the Impact of Coronavirus Disease 2019 (COVID-19) (Extension of Operation) (No. 4) Order 2021 [PU(A) 485/2021].

(p) Part II of the Act provides relief for contracting parties who are unable to perform contractual obligations arising from any of the categories of contracts due to the measures prescribed, made or taken under the Prevention and Control of Infectious Diseases Act 1988 (Act 342).

(q) Section 7 in Part II of the Act states that:

Inability to perform contractual obligation

7. The inability of any party or parties to perform any contractual obligation arising from any of the categories of contracts specified in the Schedule to this Part due to the measures prescribed, made or taken under the Prevention and Control of Infectious Diseases Act 1988 (Act 342) to control or prevent the spread of COVID-19 shall not give rise to the other party or parties exercising his or their rights under the contract.

(r) Seven categories of contracts are specified in the Schedule to Part II and these include the following: Construction work contract or construction consultancy contract and any other contract related to the supply of construction material, equipment or workers in connection with a construction contract.

(s) s. 7 of the Covid-19 Act just because the country is experiencing a pandemic and that there have been, and still are, MCO in force to curb the spread of the disease. The situation plaguing the nation, in general, does not relieve the contractor of a project from the burden of proving, on a balance of probabilities, that:

(i) it is unable to perform any contractual obligation whereby the precise duty or duties under the contract should be specified;

(ii) the inability to perform the contractual obligation arises from one of the categories of contracts as listed in the Schedule to Part II of the Covid-19 Act; and

(iii) the inability to perform the contractual obligation is due to the measures prescribed, made or taken under Act 342 to control or prevent the spread of Covid-19. The precise measure as prescribed, made or taken under Act 342 must be identified and the nexus between the said measure and the plaintiff's inability to perform its contractual obligation(s) must be demonstrated.

(t) Hence, even if the plaintiff has to establish that its contract with the defendant falls under the said item 1 and prove elements (i), (ii) and (iii) as outlined above to the satisfaction of this court -

(u) In the case of SN Akmida Holdings Sdn Bhd v Kerajaan Malaysia [2022] 2 CLJ 302, the HC held that “After having scrutinised the Covid-19 Act, it is evident that there is no express provision in the said Act which states that it is to apply to construction contracts and/or construction work contracts entered into by the Government. This is in stark contrast to s. 2 of the CIPAA which stipulates that the CIPAA "... applies to every construction contract made in writing relating to construction work carried out wholly or partly within the territory of Malaysia including a construction contract entered into by the Government… it is my finding that if Parliament had intended to include Government construction work contracts in the said item 1, it would have provided words to that effect in the Schedule to Part II of the Covid-19 Act. By not having done so, I am not prepared to hold that Government construction work contracts are meant to be covered by necessary implication.”

(v) Based on the case of SN Akmida (no appeal to COA), Act 829 does not apply on Government construction contracts.

Doctrine of Frustration – section 57(2) Contracts Act 1950

(w) If there is no force majeure event can be triggered under the force majeure clause in the contract or the force majeure clause in the contract does not cover Covid-19, the doctrine of frustration would be the go-to relief.

(x) Doctrine of frustration is dealt with under Section 57(2) of Contracts Act 1950 as ‘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’.

(y) There has been an instance where a contract is held to be frustrated under Section 57 particularly by virtue of an outbreak of the Japanese Encephalitis6 (“JE”) disease. In the case of Yew Siew Hoo & Ors v Nikmat Maju Development Sdn Bhd and another appeal [2014] 4 MLJ 413 (Court of Appeal), there was an outbreak of JE and Bukit Pelandok was one of the worst hit areas. The State Government on 20 March 1999 gazetted the State of Negeri Sembilan to be a JE infected area and banned the rearing and sale of pigs in the affected areas. The High Court found that by virtue of the JE outbreak, the tapping agreement and service agreements entered into between the parties are void on the ground of frustration of contract. It must be noted that in this case, the parties did not appeal against the High Court’s decision on the same.

(z) The scope of Section 57 concerns 3 elements3, namely:

(a) the frustrating event must have not been provided for in any provisions of the contract between the parties. Otherwise, the contract applies;

(b) the frustrating event is not self-induced; and

(c) the frustrating event has changed the circumstances to make the performance of the contract radically different from that originally undertaken. The court must find it practically unjust to enforce the original promise.

(aa) The test applicable to determine whether an event is a frustrating event within the ambit of Section 57 is the ‘radical change in the obligation test’. The test indicates that frustration of contract will occur where there is a radical or fundamental change in circumstances which renders the performance of the contract to be legally and physically impossible. Such change must be more than merely onerous or more expensive, it must be positively unjust to hold the parties to their bargain.

(bb) Depending on the circumstances of your contractual obligations and performance, the ongoing COVID-19 pandemic may fulfill the said test that renders your contract frustrated.

(cc) Remedy to Frustration–

Should any of the contracts entered by you or your company be deemed frustrated within the ambit of Section 57, such contract becomes void. However, the termination is only as to the future obligations. It is not void from the beginning.

(dd) Parties to a void contract are entitled to the following remedies:

(a) Restitution under Contracts Act 1950 – Section 66 states that when an agreement is discovered to be void i.e. void under Section 57, any party who has received any advantage from the other party is bound to restore it, or to make compensation for it, to the person from whom he received it.

(b) Restitution under Civil Law Act 1956 –

(i) Section 15(2) states that if A paid B a sum of money in pursuance of the contract entered into between them, before the discharge of the contract, A is entitled to recover from B the sum so paid.

(ii) Section 15(3) states that where B obtained from A, a valuable benefit (other than payment of money as discussed in Section 15(2) above) before the discharge of the contract, A may recover the value of the said benefit as the court considers just, having regard to all the circumstances of the case.

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