by Low Kian Seng
This post discusses the possible impact of COVID-19 and MCO on construction contracts.
1. On 11 March 2020, the World Health Organization (“WHO”) declared COVID-19 a worldwide pandemic. Following the ever increasing number of new COVID-19 cases in Malaysia, the YAB Prime Minister, via a television speech, announced that Malaysia shall impose a Movement Control Order (the “MCO”) to curb the threat of COVID-19, from 18 March 2020 to 31 March 2020, which was then subsequently extended to 14 April 2020.
2. Apart from restricting the people’s movement as its name suggests, the implementation of the MCO has substantially curbed economic activities, allowing only the operation of “essential services” such as banking and finance, electricity and energy, healthcare and medical. In other words, businesses that are “non-essential services” are prohibited from operating unless otherwise permitted in writing by the Director General. (Work from home is possible, depending on the nature of the business or activity involved.)
3. As many construction projects are “non-essential services”, the affected contractors are unable to carry out their works during the MCO. Accordingly, questions in respect of their contractual obligations arise – eg. whether their contracts still require works to be done in view of the COVID-19 outbreak and the implementation of the MCO? Whether any change to their contractual obligations?
4. To answer these, 2 areas that have to be considered. First – whether the contract contains any clause saying what is to happen in such a situation. Second – where there is no such clause, whether the contract is affected by this type of situation under the common law.
B. CONTRACT CLAUSE – FORCE MAJEURE
5. Clauses that provide for special and extreme situations (eg. war, epidemic, etc) are commonly called force majeure clauses. Force majeure means “a circumstance beyond the control of a party to a contract, which enables that party to escape liability for failing to perform the contract as a result of the circumstance”.
6. A force majeure event is one causes the performance of a contract to be impossible, without the fault of either party., As a result, the existing contractual obligations are suspended temporarily or permanently, depending on what the clause says.
(1) Must be Expressly Provided in the Contract
7. In order for a party to rely on it, the contract must contain the majeure clause. Per the High Court in Muhammad Radhieddeen Bin Abdul Khalid v Saujana Triangle Sdn Bhd.
8. As to what constitutes force majeure, this will depend on the wording of the clause in question. It will be easier to understand by looking at the examples below.
(3) Agreement and Conditions of PAM Contract 2006 (with Quantities) (“PAM 2006”) and PAM Contract 2018 (with Quantities) (“PAM 2018”)
9. Article 7(ad) of PAM 2006 defines “force majeure” to mean “any circumstances beyond the control of the Contractor caused by terrorist acts, governmental or regulatory action, epidemics and natural disasters” (emphasis ours). The same definition has been adopted in PAM 2018.
10. The MCO would fall under “Governmental or regulation action” whereas “epidemics” would cover COVID-19 outbreak.
11. Please note that under both PAM 2006 and PAM 2018, a force majeure event only entitles the contractor to claim for extension of time, but not to suspend its performance and/or terminate the contract.
(4) Standard Form of Design and Build Contract (2018 edn) by Asian International Arbitration Centre (“AIAC Design & Build Form”)
12. Clause 56.1 of AIAC Design & Build Form is more elaborate than the force majeure clauses in PAM 2006 and PAM 2018:
“56.0 FORCE MAJEURE
56.1 Definition of Force Majeure
(a) In this Clause, “Force Majeure” means, an exceptional event or circumstance:
(i) which is beyond a Party’s control;
(ii) which such Party could not reasonably have provided against before entering into the Contract;
(iii) which, having arisen, such Party could not reasonably have avoided or overcome; and
(iv) which is not substantially attributable to the other Party.
(b) Force Majeure may include, but is not limited to exceptional events or circumstances of the kind listed below so long as conditions in sub-clause 56.1(a) are satisfied:
(i) war (whether declared or not), hostilities, invasion, act of foreign enemies;
(ii) insurrection, revolution, rebellion, military or usurped power, civil war, terrorism;
(iii) riot, commotion, disorder, strike or lockout by persons other than the Contractor’s Personnel and other employees of the Contractor and Sub-contractors; and
(iv) munitions of war, explosive materials, nuclear explosion, ionizing radiation or contamination by radioactivity or chemical contamination unless caused by the negligence, act, omission or default of the Contractor’s Personnel, or its agents;
(v) pressure waves caused by aircraft or other aerial devices travelling at sonic or supersonic speeds; and
(vi) natural catastrophic including but not limited to earthquakes, typhoons, tsunami, volcanic activity or any operation of the forces of nature.
13. “Force majeure” – which is defined very widely in Clause 56.1(a) – should be sufficient to cover the outbreak of COVID-19 and the imposition of the MCO, even though pandemics or epidemics was not listed as one of the examples in Clause 56.1(b).
(5) Universiti Teknologi Malaysia v Maraya Sdn Bhd
14. This case is an example of the other end of the spectrum, where the force majeure clause is general and brief. Here, the High Court was required to consider the following force majeure clause (emphasis ours):
“(4) The Vendor shall not be liable to the Purchaser for any failure to fulfil any terms of this Agreement if such fulfilment is delayed hindered or prevented by force majeure.”
15. The phrase “force majeure” was not defined in that contract. Notwithstanding this, the High Court gave it a dictionary meaning and held that:
(a) Force majeure relates to dislocation of business by various actions and events but does not cover conditions of business or economic situations (such as the financial crisis of 1997/8) as the state of business or economic upturns and downturns are part and parcel of doing business.
(b) The force majeure clause is not intended to enable a party to renege on its obligations. Rather, it is intended to protect each party from strikes, lockouts, breakdowns or other circumstances beyond the control of the parties.
16. Based on Maraya, COVID-19 and the MCO is likely to be covered by a general force majeure clause as they are circumstances beyond the control of the contracting parties.
(6) Effect of Force Majeure on the Contract
17. As mentioned above, the effect of a force majeure event on contractual rights and obligations depends on the terms agreed.
18. For short-term force majeure events, contracts commonly provide for a temporary suspension of obligations until the event is over. For force majeure events of a prolonged duration, some clauses give the parties an option of terminating the contract.
19. A force majeure clause may stipulate the procedure which the parties must follow upon the occurrence of a force majeure event. For example, a party may be required to provide notice to the other party when it becomes aware or ought to have been aware of such an event. Such notice will make the other party aware of the event, thus affording them more time to deal with it.
20. The contract may even say that that the provision of such a notice is a prerequisite before a party can rely on a force majeure clause. For example, Clause 23 of PAM 2006 disentitles the contractor from applying for extension of time for a “Relevant Event” (which includes a force majeure) if the notice requirement is not complied with.
21. Parties to commercial transactions should consider including a force majeure clause in their contracts where possible. Having such a clause will help to make more certain the rights and obligations of the parties when special or extreme situations occur.
22. Where the contract does not contain such a clause, force majeure cannot be relied on. However, not all hope is lost. The common law – specifically the doctrine of frustration of contracts – will have to be considered, to see whether the contract is still intact or otherwise. That will be the subject of my next post.
The contents of this article are published for the purpose of
general information only; they are not to be regarded, used or relied on as
legal advice for any matter. Please contact us if you require legal
advice specific to your case.
 YAB Prime Minister’s Speech on 16 March 2020.
 Please see the Schedule of Prevention And Control of Infectious Diseases (Measures Within the Infected Local Areas) Regulations 2020 (the “Regulation”) for the full list of “Essential Services”.
 See Reg 5(2) of the Regulation.
 Matsaukis v Priestman & Co  1 KB 681.
  1 LNS 841, pg 14, para 17.
 Clauses 30.7 and 30.8 provide for the circumstances when a contractor can suspend works but they do not seem to have covered the situation of COVID-19 and/or the MCO.
  1 LNS 312
 Supra, pg 6.