MARCH 27 — In response to the Covid-19 pandemic, a nationwide movement control order came into force beginning 18 March 2020. Many businesses are left in perplex dealing with time-sensitive contracts. This article aims to shed some light on the effect of the Covid-19 pandemic to the inevitable disrupt in contractual performances.
Movement control order (MCO)
The MCO is in place as a measure to combat the surge of Covid-19 in the country. As many are aware, the MCO was initially in place for an experimental period of a fortnight, taking effect from March 18 until the March 31, 2020.
However, on March 25, the MCO period is forced to be extended until April 14 in view of the rising number of fresh Covid-19 cases by the day.
Malaysians are also warned to brace themselves for potential further extension of the MCO depending on the pandemic’s situation in the coming weeks.
The inevitable disruption to local and multinational businesses nationwide begs the question on what the legal repercussion would entail to failure of performing existing contractual obligations.
Force majeure clauses
Corporations may want to take a look at their force majeure clauses which often exist to protect parties from the inability to fulfil contractual duties due to supervening events.
The operation of a force majeure clause depends on its construction. Some circumstances normally specified are “acts of God,” “acts of government,” “war” and “riots” Most force majeure clauses would even insert a catch-all provision such as “events beyond the control of parties” or “any other events.”
However, the catch-all provision may only save you if its interpretation remains within the nature of the preceding specific circumstances. That means, if say “inclement weather” is the only supervening event spelt out as a force majeure event, one may not read "explosions" into it because the two are different in nature.
In the current Covid-19 calamity, look out for events such as as "outbreak," "pandemic," "epidemic" or "contagious diseases" in your force majeure clauses.
Doctrine of frustration
Alternative to force majeure, you may also wish to explore whether frustration applies. What does this mean and what does it entail?
Generally, when a change of circumstances arises after a contract is executed, and such change renders the contract to be legally or physically impossible to perform, the contract is said to be frustrated. Under section 57(2) of Contracts Act 1950, a frustrated contract results to termination.
It is more difficult to establish frustration for the simple commercial reason that courts would generally seek to enforce contracts rather than dismissing them.
A contract would not be frustrated merely because it turns out to be difficult and/or onerous to perform. An ideal circumstance must be such that through the default of none, a contractual obligation has become incapable of being performed and/or the circumstances would render the contract radically different from its original intention.
Some contracts may only be partially frustrated – this is where a contract is not wholly impossible to perform just because a portion of the subject matter ceases to exist. In such instance, the court may either direct for specific performance and/or award compensation.
Force majeure vs frustration – which one offers the best relief?
Of the two — force majeure clause and doctrine of frustration, which one fits the shoe? Well, that would depend on the desired outcome.
Conceptually, the operation of force majeure and frustration are different.
Force majeure allows for discharge of contract or some other form of relief on a contingency without necessarily terminating the contract.
It is great in a sense that it provides a more nuanced response to supervening events. For instance, it may temporarily suspend a party’s duty to perform a contract or it may even allow for an extension of time. To simply put, the contract is not automatically brought to an end.
On the other hand, frustration entails a stringent and one-faceted eventuality — that is termination. This, however, may be desirable if the performance of the contractual obligation is radically different from what was agreed upon.
Take a look at other relevant provisions in your contract — extension of time, essence of time, consequence of delay, termination clause or the likes of it.
For all you know, the repercussion to the Covid-19 outbreak is actually spelt out in other limbs of your contract. It is best to read your contract in its entirety.
* Dayana Najwa and Khaw Tzer Shern are lawyer and trainee lawyer, respectively, Rosli Dahlan Saravana Partnership.
* This is the personal opinion of the writer(s) or publication and does not necessarily represent the views of Malay Mail.