Contract Law

How Does The Lockdown Impact Your Contractual Obligations?

By July 15, 2021 July 17th, 2021 No Comments

Introduction

As a result of recent governmental measures implemented to curb the spread of new variants of COVID-19 and to bring our COVID-19 cases down, most businesses which are not classified as “essential” are strictly required to cease physical operations and operate remotely.

Contractual obligations continued to run and many business owners whose operations have been halted or severely disrupted are still obliged to perform their contractual obligations. Hence, what measures are available to business owners when faced with such a dilemma?

What is “Force Majeure Clause”?

Force Majeure is a contractual provision that is commonly found in well drafted contracts which relieves or temporarily suspends the contractual obligations of a party when a specified intervening event or circumstance beyond their control (force majeure event) has occurred, thereby rendering performance of the contract illegal or impossible. Typical examples of force majeure events include Acts of God, natural disasters, war and governmental sanction.

Can I rely on Force Majeure during COVID-19?

Force Majeure clauses are not implied by law and must be intentionally inserted into the contract for any party to rely upon it.

There are 2 key points to consider:

  1. Wording – the exact wordings on the scope of intervening events that trigger the force majeure clause are especially consequential, as parties may only rely upon such clauses in respect of COVID-19 if words such as “disease”, “epidemic” or “pandemic” are included within the clause. The wording of the force majeure clause also determines the remedies and recourse available to you.
  2. Causation – how has the force majeure impacted or affected your ability to perform your contractual obligations? The fact that business and cashflow is adversely affected as a result of the force majeure does not automatically give you the right to suspend or waive your contractual obligations.

Given the Malaysian Government’s imposition of FMCO and EMCO, force majeure clauses that mention “governmental action” may be applicable as well. Consult a lawyer to determine the application of FMCO and EMCO with respect to your force majeure clause.

It is important to note that the burden of proving that a force majeure event has occurred is on the contracting party seeking to rely on force majeure clause.

Force Majeure applies to my contract. What happens next?

Even if your contract contains an applicable force majeure clause, the effects, remedies and recourse available to you may vary depending on the construction of each individual force majeure clause, ranging from temporary suspension of specific contractual obligations to the unilateral termination of contract.

Typically, the party that successfully establishes that contractually recognized force majeure events (such as Covid-19) have prevented them from performing his/her contractual obligations shall not be liable to the other party for his/her non-performance.

What happens if my contract does not have a Force Majeure clause?

If there is no force majeure clause in the contract, then parties may consider resorting to the common law doctrine of frustration.

The doctrine of frustration essentially states that where after the formation of the contract, the contract becomes physically or legally impossible to perform due to an unforeseen change in circumstances caused without fault of either party (event of frustration), the parties would be released from their obligations under the contract.

Fundamentally, the doctrine of frustration seeks to protect contracting parties from contracts which have been radically changed by an external event, such that it would practically unjust for the law to enforce such contract. However, it must be noted that the Courts are reluctant to interfere in the bargain between willing contracting parties and have thus narrowly construed the circumstances which may give rise to frustration.

For a party to successfully rely on the doctrine of frustration, they must conclusively prove that the unforeseen change in circumstances surrounding the contract have rendered their contractual obligations legally or physically impossible, and not simply more difficult or expensive.

Depending on the nature of your contract, it is possible for the outbreak of Covid-19 to be an event of frustration, however if you wish to reach a truly definitive conclusion of whether you may rely on the doctrine of frustration, it is highly advisable for you to engage a legal advisor to undertake a thorough analysis of the contract and facts surrounding you or your company.

What happens if my contract is frustrated?

If your contract has been deemed frustrated, such contract becomes void and both parties would be released from their contractual obligations. Upon discharge from such contract, all sums paid prior to frustration shall be returned and any sums payable will cease to be payable.

If you have incurred expenses prior to the event of frustration, the Court may allow for you to recover such expenses from the other party. If you have provided a valuable benefit (other than money) from the performance of the contract, the Court may also allow for you to recover the value of said benefit.

Conclusion

As the Covid-19 outbreak continues to reshape the business environment in Malaysia, it is prudent for business owners to obtain legal advice as soon as possible upon realising that a force majeure event or event of frustration has occurred, to ensure that all their rights are reserved accordingly.

Moving forward into the new normal, prudent business owners who are seeking to enter into new contracts should engage competent legal representation to help ensure that all of your contractual obligations are covered by comprehensive force majeure clauses.

Parting Advice:

  1. A contracting party seeking to rely on the Covid-19 outbreak as a force majeure event should first determine whether the contract has a force majeure clause.
  2. If so, whether the exact scope of intervening events in the force majeure clause covers the Covid-19 outbreak.
  3. A notice invoking force majeure clause must be given to the other contracting parties.
  4. It is important for such contracting party show that it has taken reasonable steps to mitigate the effect of the pandemic, where possible.
  5. Be sure to keep all lines of communication open between all contracting parties, to facilitate any renegotiation of specific portions of the contract that have become increasingly onerous to perform due to FMCO.
  6. Different parties enter into contracts for different purposes, all have their own interpretation of what constitutes force majeure. To avoid any misinterpretation of your contractual rights, be sure to engage your legal advisor to undertake a review of all your contractual obligations and ensure that your contracts include a well drafted force majeure clause.
  7. If your contract does not contain an applicable force majeure clause, it is highly advisable for you engage your legal advisor to undertake a review of the facts surrounding your contract to determine conclusively whether you may alternatively invoke the doctrine of frustration.

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This article is written by Yong Li Zen, under the tutelage of Juslyn Chin Lian Jie. Juslyn leads the China Desk of Darryl, Edward & Co. and her scope of practice encompasses a wide array of corporate and commercial matters.

If you have any queries, please contact Juslyn Chin Lian Jie.

 

Copyright © 2021 Darryl, Edward & Co. All rights reserved.

The information contained in this article is provided for informational purposes only, and should not be construed as legal advice on any subject matter. You should not act or refrain from acting on the basis of any content included in this article without seeking legal or other professional advice.

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