How Would the COVID-19 Outbreak Affect My Contracts?
The recent novel coronavirus outbreak (officially named “COVID-19”) has affected millions across the globe, with the Director-General of the World Health Organization (“WHO”) calling the outbreak “unprecedented” and declaring a global public-health emergency last month.
In fact, the Prime Minister of Malaysia had imposed a Movement Restriction Order in Malaysia on 16 March 2020 between the period of 18 March 2020 to 31 March 2020.
In light of the outbreak, it is crucial to consider how your business operations may be affected – and a good place to start would be by examining the “force majeure” clause in your contracts.
1. What is a “Force Majeure” Clause?
Simply put, a “Force Majeure” clause recognises certain external events out of the control of the parties, that have an effect of suspending or even releasing the parties from the performance of the contract.
2. What is the Legal Position in Malaysia on Force Majeure Clauses?
Unlike jurisdictions such as China, in which the Civil Code strictly provides for force majeure events in contracts, the law of contract in Malaysia does not provide for the doctrine of force majeure.
However, parties are free to agree to the inclusion of such clauses in their contracts. As with the standard rules of contract, it is up to the parties to define what constitutes a Force Majeure event including the reliefs and remedies available to each party if such an event occurs.
3. How Does the COVID-19 Outbreak Link to Force Majeure Events?
Force majeure events in contracts are commonly defined as, among others, “acts of God”, “acts of the Government”, “acts of war” or even general phrases such as “other supervening events beyond the Parties’ control” . Certain contracts may even extend their definitions to cover “pandemics” or “epidemics”.
In contracts where Force Majeure clauses cover pandemics or epidemics, it is highly likely that the COVID-19 outbreak would constitute a Force Majeure event. However, it is arguable that the COVID-19 outbreak could also constitute an “Act of God”, and the various precautionary measures such as mass quarantines taken by governments around the world could constitute “acts of the Government”.
4. What Does this Mean for My Contracts?
While the COVID-19 outbreak may be provided for in your contract’s Force Majeure clause, this does not mean that parties are immediately free to suspend or be discharged from their respective obligations.
It is imperative to consider how exactly the outbreak has affected the performance of obligations under your contract, and in doing so certain matters should be considered, such as:-
a. How foreseeable the event (the outbreak) or the consequences of the outbreak would have been at the time the contract was signed;
b. Whether the parties could have mitigated the losses suffered;
c. Whether the outbreak was the sole, or main, cause of the inability to perform the contractual obligations; and
d. Whether the contract provides for conditions that must be fulfilled when a force majeure event occurs.
An example of such a situation would be - if you or a counterparty have been unable to perform your payment obligations due to a loss of revenue from another sale falling through due to the outbreak, you may arguably be unable to rely on the COVID-19 outbreak as a Force Majeure event, as the Government has recently announced the 2020 Economic Stimulus Package which aims to mitigate economic burdens on citizens and businesses that may have been caused by the outbreak.
5. What If My Contract Does Not Contain a Force Majeure Clause?
It may be possible to rely on the doctrine of frustration of contract, which is recognised in the Malaysian Contracts Act 1950.
However, there is a much higher threshold to meet for a defaulting party to be discharged of its contractual obligations. In the context of the COVID-19 outbreak, the outbreak itself or any precautionary measures taken by the Government or other parties must have rendered the performance of the contract impossible or unlawful.
6. How Should I Proceed with My Contracts?
In any case, it is important to note that the fact that the outbreak has caused the performance of the contract to be more difficult than it normally would have been, would usually be insufficient to suspend or release the parties from their contractual obligations.
If you believe your contract would be impacted by the outbreak or that it may constitute a Force Majeure event, it is important to seek legal advice so as to protect yourself from potential losses arising out of being found in breach of a contract, or even a counterparty invoking Force Majeure to get out of performing its contractual obligations to you.
The COVID-19 outbreak has undoubtedly impacted business operations worldwide, particularly in countries with a more critical scale of contagion. Moving forward, it would be wise to ensure that all new contracts being entered into contain specific Force Majeure provisions that provide for an alternative course of action should the COVID-19 outbreak further impact the performance of the contract.