Part One – The Covid-19 Pandemic and Movement Control Order – Is this “Force Majeure” in Construction Contracts?
The World Health Organisation on 11 March 2020 declared Covid-19 a pandemic. At that point, the virus had infected 18,000 people in 114 countries. Locally, in response to the spike in detected Covid-19 cases, the Prime Minister of Malaysia announced the imposition of a Movement Control Order (“MCO”), pursuant to the Prevention and Control of Infectious Diseases Act 1988 and the Police Act 1967, with effect from 18 March 2020.
The MCO implements sweeping measures with the objective of containing the spread of the virus, including closure of all private work premises, except for designated “essential services” such as daily needs, banks, transportation, healthcare services and so on.
Consequently, the MCO requires the closure and cessation of works in nearly all construction sites in Malaysia. This has been confirmed by the Ministry of Works. Even before the MCO came into effect, containment measures in other countries around the world had begun to cause disruptions to supply chains and procurement of resources and personnel ranging from raw materials to qualified consultants from affected countries.
Here are some contractual issues which may arise in light of both the pandemic and the MCO. We start with considering whether the MCO and pandemic would be considered an event of “force majeure” in construction contracts, but do stay tuned for our further updates on:
- Whether the MCO and pandemic would be events entitling extensions of time under the PAM and JKR / PWD standard form contracts;
- Whether the MCO and pandemic fall under “Change in Law” or “Compliance with Law” provisions in construction contracts; and
- Important steps to take and considerations for construction industry players.
Force Majeure
In a contract, a force majeure event is usually defined as one which neither party could have reasonably predicted and which affects the ability of one or more parties to fulfil contractual obligations. Hence, the parties make contractual provisions to deal with such an event occurring. A pandemic such as Covid-19 and the subsequent MCO may arguably be force majeure events, both being unpredictable in nature as well as having effects on the ability of one or more parties to fulfil obligations. Chitty on Contracts 32nd Edition, at paragraph 15-152, provides as follows: “[…] “force majeure clause” is normally used to describe a contractual term by which one (or both) of the parties is entitled to … [be] excused from performance of the contract, in whole or in part, or is entitled to suspend performance or to claim an extension of time for performance, upon the happening of a specified event or events beyond his control […]”
Many construction contracts have a force majeure clause, although the scope and risk allocation in such a clause may vary greatly between different contracts. The exact ambit of what constitutes a force majeure, and the consequences and remedies to such event occurring, would of course be specific to each individual contract, but many construction industry players and consultants would be concerned about time and cost impacts to their works arising from the MCO and pandemic. In the English case of Lebeaupin v. Richard Crispin and Co. [1920] 2 K.B. 714 at 720, it was held that legislative or administrative interference (such as the MCO) could fall within the term ‘Force Majeure’.
“…in Matsoukis v. Priestman. (2) That learned judge was, if I may respectfully say so, clearly right when he said that the phrase “force majeure” was not interchangeable with “vis major” or “the act of God.” It goes beyond the latter phrases. Any direct legislative or administrative interference would of course come within the term: for example, an embargo…”
However, it would be prudent to take note of the High Court’s statement in Progressive Ocean Sdn Bhd v Northern Corridor Implementation Authority (‘NCIA’) [2016] MLJU 304 which made reference to Intan Payong Sdn Bhd v Goh Saw Chan Sdn Bhd [2005] 1 MLJ 311 that: “This Court is of the considered view that for for a party in an agreement to invoke a force majeure clause, the burden lies on the party wishing to rely on it, to prove the force majeure event, and as a result of such force majeure event, the party could not perform his part of the obligations in the agreement… ”. (Emphasis added)
Further, there must be a force majeure clause to rely on in the first place, which must be carefully scrutinised in terms of ambit of what is deemed a force majeure event, the requirements for notice and the duty to mitigate, as well as ensuing consequences to rights and obligations if such an event occurs. In Muhammad Radhieddeen bin Abdul Khalid v Saujana Triangle Sdn Bhd [2017] MLJU 950, the High Court held: “In regard to the aforesaid contention, the most significant fact is that the present SPA does not contain any force majeure clause, thus rendering this defence for non-compliance with the contract to be unsustainable. A defence of this nature would be inapplicable in the case of a contract that makes no provision for it. The D[efendant] made reference to a case in point from Singapore, Magenta Resources (S) Pte. Ltd. v China Resources (S) Pte. Ltd. [1996] 3 SLR 62 where Rajendran, J remarked:
“What is referred to as force majeure in our law (as opposed to French law from which that term originates) is really no more than a convenient way of referring to contractual terms that the parties have agreed upon to deal with situations that might arise, over which the parties have little or no control, that might impede or obstruct performance of the contact. There can therefore be no general rule as to what constitutes a situation of force majeure. Whether such a (force majeure) situation arises, and, where it does arise, the rights and obligations that follow, would all depend on what the parties, in their contract, have provided for.” (Emphasis added)
Parties should also be wary of wrongly invoking the force majeure clause, which may then amount to a breach or anticipatory breach of the contract if it is shown that the force majeure assertion was invalid. In the present context, this may happen if, for example, the works in question are part of “essential services” and are thus excluded from suspension under the MCO, or the pandemic is shown later to have had no effect on the party’s ability to perform obligations. Parties should therefore not invoke the clause lightly, as there may be grave repercussions.
Contributed by:
Joshua Chong (Partner)
(E): joshuachong@rdl.com.my
(D): 03-26329876
Chen Huan Yung (Associate)
(E): hychen@rdl.com.my
(D): 03-26329947