5 Things to Consider When Invoking a Force Majeure During a Covid-19 Outbreak in Malaysia

The Covid-19 outbreak has caused a severe economic downturn and impacted many industries worldwide. Businesses are unable to perform certain contractual obligations, resulting in a complete failure to perform or a delay in performance. Generally, the liable party is required to remedy the counterparty by way of monetary compensation. In such an event, a force majeure clause may be invoked to protect the party from liability.

The disruptions have impacted many industries such as manufacturing, construction, aviation and tourism, to name a few. Image Credit: Eric Mclean (Unsplash)

What is force majeure?

• Force majeure is a contractual clause that generally functions to relieve the performance of contractual obligations for a period of time as stipulated under the contract. When the clause is successfully triggered, the defaulting party cannot be sued by the counterparty for monetary compensation.
• It concerns supervening events. This includes events that have taken place after the execution of the contract, events which are beyond the control of either party and events which affect the performance of the contract.
• A force majeure clause must be certain to be valid. It must specify the supervening events. For instance, a clause providing that the “usual ‘force majeure’ clauses shall apply” will be invalid for uncertainty.

A party seeking to rely on a force majeure clause has the burden to prove that an event that has happened is outside his/her reasonable control, causing the performance of the contractual obligations to be hindered or prevented. In proving that an event that has happened is outside his/her reasonable control, the party has to show that reasonable steps have been taken to mitigate the effects of the event.

Now, let us explore the considerations that parties to a contract should know before relying on force majeure during the Covid-19 outbreak.

Check your contract for the following:

1. Whether the Covid-19 outbreak falls within the scope of the force majeure clause

If the force majeure clause specifically includes “epidemics”, “pandemics”, “diseases” (or their equivalents), the Covid-19 outbreak is very likely to be captured by the clause.

Act of God

A question arises as to whether the Covid-19 outbreak is an “Act of God” given that it is a common provision of a force majeure clause. The answer is likely “no” because the Malaysian courts are of the view that an “Act of God” is :

“an accident due to natural causes, directly and exclusively without human intervention, and which could not have been avoided by any amount of foresight and pains and care reasonably to be expected of”.

However, this does not mean that parties wishing to rely on force majeure are left without any recourse. Given that governmental restrictions, i.e. the MCO, is incidental to the Covid-19 outbreak, a party wishing to invoke the clause is likely to succeed if the clause includes provisions such as “governmental action”, “governmental restrictions”, “governmental regulation”, or more specifically, “quarantine” (or their equivalents).

2. Whether the force majeure clause requires the supervening event to “hinder”, “delay” or “prevent” performance

This is dependent on how the clause is worded. “Hindered”, “delayed” or “prevented” performance are associated with different levels of obstacles to contractual performance. Some supervening events merely require more time for completion, rather than a complete inability to perform a contractual obligation. Thus, the clause should be clear on the perimeters of the obstacle.

For instance, the lack of manpower to perform contractual obligations due to the Covid-19 outbreak may amount to hindrance or delay but not prevention of performance. Governmental restrictions due to the outbreak, i.e. the MCO, which prohibits the performance of contractual obligations may amount to the prevention of performance.

3. Whether there are any exceptions within the force majeure clause

The force majeure clause may include exceptions. For example, a party cannot rely on force majeure simply because the performance of the contract is more costly following an unprecedented event. The clause may provide that a “business downturn” shall not be claimed as force majeure. Thus, a party cannot use the business impact rendered by the Covid-19 outbreak as a basis to claim force majeure.

A business downturn caused by the pandemic may not succeed as a claim for force majeure. Image Credit: Adeolu Eletu (Unsplash)

4. Whether the force majeure clause stipulates notice provisions or other formalities to be fulfilled

It is common that force majeure clauses require notice to be given to the party claiming force majeure. To illustrate, the clause may state that: “the party claiming an event of force majeure shall promptly notify the other party in writing within twenty-four (24) hours after the occurrence of the force majeure event…” Whether there is valid notification is both a question of fact and law.

As much as a party is excited to claim for force majeure, he/she has to comply with the procedural requirements contained in the clause.

The defaulting party should ensure that the procedural requirements of the contract (i.e. timing) and mitigating efforts have been carried out. Image Credit: Cytonn Photography (Unsplash)

5. Whether intervening government statutes apply

The most important government soon-to-be statute to be noted is the Temporary Measures for Reducing the Impact of Coronavirus Disease 2019 (COVID-19) Bill 2020.

It provides that the non-breaching party or parties to a contract cannot exercise their rights under the stipulated categories of contracts. They are:

• 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.
• Perform bond or equivalent that is granted pursuant to a construction contract or supply contract.
• Professional services contract.
• Lease or tenancy of non-residential immovable property.
• Event contract for the provision of any venue, accommodation, amenity, transport, entertainment, catering or other goods or services including, for any business meeting, incentive travel, conference, exhibition, sales event, concert, show, wedding, party or other social gathering or sporting event, for the participants, attendees, guests, patrons or spectators of such gathering or event.
• Contract by a tourism enterprise as defined under the Tourism Industry Act 1992 and a contract for the promotion of tourism in Malaysia.
• Religious pilgrimage-related contract.

The Temporary Measures for Reducing the Impact of Coronavirus Disease 2019 (Covid-19) Act 2020 will be gazetted today, benefitting individuals and companies affected by the pandemic. Image Credit: David Emrich (Unsplash).

As such, in the context of the categories of contracts, the breaching or defaulting party need not rely on a force majeure clause to escape liability but rely on the Act (once gazetted).

Conclusion

The application of a force majeure clause is ultimately dependent on how the clause itself is worded. As such, it is important to look into the provision of the clause itself to determine whether there are words such as “disease”, “epidemic”, “pandemic” (or their equivalents) which may capture the Covid-19 outbreak.

Note: Despite the fact that the World Health Organisation (WHO) declared Covid-19 a pandemic on 11th March 2020, Malaysia has never formally declared it as a pandemic.

Therefore, force majeure clauses containing the word “disease” may be more effective than clauses containing the word “epidemic” or “pandemic”.

A party wishing to rely on force majeure should also determine whether government restrictions, i.e. the MCO, fit within the provision of the clause.

Importantly, there must be a causal link between the event and the impact made to the performance of one’s contractual obligations, such as hindrance or prevention of the performance.

It is hoped that a fairer and healthier contractual relationship can be achieved by way of effectively incorporating a force majeure clause, in which obligations arising therein are unable to be performed due to the Covid-19 outbreak.

Disclaimer: All information displayed in this article is strictly intended for general information and knowledge only. Do seek advice from a qualified lawyer if in need of legal assistance.

This article was written by Daniel Tan and reviewed by Melissa Lim and Lim Mei Lin.