COVID-19 : CONTRACTUAL OBLIGATIONS OBSTRUCTED PART 1 – FORCE MAJEURE CLAUSE
The coronavirus disease, COVID-19, has taken the world by storm when the outbreak was first discovered in December 2019. As the impact of Covid-19 builds by the day, supply chains are being significantly disrupted and businesses’ rights and obligations under contracts are coming into sharp focus.
From an economic perspective, the outbreak has dampened global economic activities and rattled the position of companies of all scale. Some may have contractual rights being obstructed by the outbreak. Some may be struggling to meet their obligations under the contracts they have entered into.
One of the common questions being asked during this pandemic is ‘whether a party can be excused for the non-performance of its contractual obligations.’ Put in the other way, many are left wondering whether there is any sort of contractual and/or statutory protection that they may seek refuge from at this time of uncertainty.
The operation of Part II of the Temporary Measures for Reducing the Impact of Coronavirus Disease 2019 (Covid-19) Act 2020 (“COVID Act”) has been extended from 1 July 2021 to 31 December 2021. Part II of the COVID Act deals with inability to perform certain contractual obligations as a result the measures implemented by the government in tackling the spread of COVID-19. However, the protection provided under Part II of the COVID Act is merely temporary in nature, it does not extinguish the right of the other parties beyond the extended period.
Therefore, to address this issue, we will have to look at the particular terms of the contract itself and the particular facts and circumstances surrounding the non-performance. In this article, we will discuss how does “Force Majuere” clause apply in a context where contractual obligation is affected by the pandemic of COVID-19.
#Scenario#
“Company B has entered into contract with Company X. The outbreak of the coronavirus (“COVID-19”) has resulted in Movement Control Order (“MCO”) and Total Lockdown. This has affected the performance of the contract.”
Q1: What’s my legal rights and/or options under the abovementioned situation?
If you or your company is in the abovementioned situation, always start by checking whether there is a Force Majeure Clause contained in the said contract. If yes, then you may have been told to invoke the force majeure clause.
However, here’s the catch, the Force majeure clauses are contractual clauses (creation of contract) but not a statutory concept.
What is referred to as force majeure in the eyes of Malaysia law depends on the contractual terms that are generally negotiated and agreed by the parties prior to entering into a contract.
As such, your contract shall include a force majeure clause in order for you to rely on force majeure. In other words, the pandemic COVID-19 may or may not constitute a force majeure event in your contract. In order to include Covid-19 outbreak as a force majeure event, it is advisable for the contract to specifically mention terms such as ‘disease’, ‘epidemic’, ‘pandemic’, ‘global health emergency’ or ‘outbreak’ which may qualify to include the Covid-19 outbreak as a force majeure event. Where no specific terms is mentioned, it is a question of interpretation of the clause which involves numerous factors including whether the list of events (if any) was intended to be exhaustive or non-exhaustive. It depends on the proper interpretation of the clause as a whole together with the other provisions in the contract and the applicable law governing the contract.
The clause does not have to be labelled “force majeure”. What you are looking for, in substance, are clauses which anticipate that there may be some sort of supervening event beyond the control of the parties.
Q2: Is Covid-19 amount as a Force Majeure Event?
Given the almost unprecedented nature of the Covid-19 outbreak and/or the actions of governments around the world in response, it is likely that Covid-19 would constitute a force majeure event under many force majeure clauses.
However, as discussed further below, just because a force majeure event has occurred does not necessarily mean that the parties will protected from liability for failing to perform or delay in performance.
Q3: When can the Clause be triggered? Is the reason of ‘less profitable’ enough?
The short answer for this Question is likely to be a ‘NO’.
It is common for force majeure clauses to specify the event or circumstances where the clause may triggered. Reference may be made, for example, to the event or circumstances having “prevented”, “hindered” or “delayed” performance.
Hence, it is unlikely to be sufficient to absolve a contracting liability while the contractual obligations merely become more difficult, more expensive, or less profitable to carry out.
Q4: What’s the effect/remedy if I rely on the Force Majeure Clauses?
The usual remedy in the event that a force majeure clause is invoked is for one or more of the parties to be exempted from its obligations and/or liability under the contract.
Force majeure clauses also sometimes provide for extension of time, suspension of time, or termination in the event of continued delay or non-performance.
Q5 : Am I 100% entitle to rely on the Force Majeure Provisions for excusing myself for the non-performance of the contractual obligation in this pandemic?
Depends. The principles laid down as abovementioned, it’s the legal theory. However, ultimately, the question of whether this pandemic can be considered as grounds for either Force Majeure Event for your case, it’s really case-to-case basis. Hence, you should consult your lawyer if you find yourself in such predicament.
IN NEXT ARTICLE:
“What if there is no force majeure clause in your contract or the force majeure clause in the contract does not cover the ongoing COVID-19?”
“What is the your other option and/or protection you could rely on?”
“What’s frustration of contract? How is it relevant to the outbreak of COVID-19”
stay tuned.
Author: Soo Jess Min, Intern
Editor: Patrick Tan
