FAQ – Will Contractors be Liable for Non-Performance of Construction Contract Due to Covid-19 Pandemic and/or MCO? 

Q1. How does Covid-19 and/ or MCO affect the performance of construction contracts?

Answer: 

The implementation of MCO in order to contain the outbreak of Covid-19 has prohibited any construction works except for critical works during Phase 1 to Phase 2 of the MCO. Though certain construction projects and services related to construction works are allowed to operate during MCO Phase 3, prior approval by MITI to resume operation is required. This would obviously disrupt the progress of on-going construction works and renders performance of most of the construction contracts impossible during the relevant period of the MCO.

Q2. What are the possible non-performances of construction contract by the contractor due to Covid-19 or the MCO?

Answer:

Some possible non-performances of construction contract by the contractor would be:a. Failure to deliver construction materials;b. Failure to supply machineries to the site;c. Failure to provide sufficient labours to carry out the construction work;d. Failure to complete work within the contractual completion date;e. Failure to submit claims in accordance with the contract.

Q3. What are the possible non-performances of construction contract by the Employer due to Covid-19 or the MCO?  

Answer: 

Some possible non-performances of construction contract by the Employer would be:

a. Failure to value and certify work done by the contractor;

b. Failure to pay for work done;

c. Failure to process and grant EOT;

d. Failure to pay for loss and expenses incurred due to delay caused by the Employer and/or the agent of the Employer;

e. Failure to give instructions as to the works which require express instruction from the Employer

Q4. What are the possible challenges which could be faced by the contractors that would affect the performance of their contractual obligations even after the MCO is being lifted?

Answer: 

a. Reduction in the numbers of workers due to workers becoming unwell or having to self-isolate which may lead to suspension of work until further notice;

b. Break of chain of supply of material as many supply chains consist of small and medium-sized enterprises (SMEs) which might be facing cash-flow problem and unable to meet their commitments;

c. There will be non-payment and/ or delay in payment which leads to contractors facing cash-flow problem and having difficulties in running their construction companies and carrying out construction work;

d. There may be imposition of additional health and safety measures with the aim to protect workers from contracting the coronavirus and such additional measures may obstruct the progress of construction works.

Q5. What can the contractors do when facing challenges in performing contractual obligations following the outbreak of Covid-19?

Answer:

Contractors should be reviewing their construction contracts to understand their contractual rights and obligations that may arise in the event of a disease outbreak. The contract may also highlight who should bear the risks and costs of any delay to projects. A good start would be to check the construction contract for a force majeure clause or any other relevant clauses (e.g.: an event beyond control of the parties)

Q6. What is force majeure clause?

Answer: 

a. Force majeure clause is an agreement between contracting parties that their contract may be varied or suspended in specified exceptional circumstances.

b. The scope and effect of a force majeure provision will depend on the words used, as interpreted in the context of the contract as a whole.

c. Reference is made to the Singaporean case of Magenta Resources (S) Pte. Ltd. v China Resources (S) Pte. Ltd. [1996] 3 SLR 62 where Rajendran, J remarked that:

“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 the 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.”

Q7. Given the construction contract provides for force majeure clause, could the Covid-19 pandemic and/ or MCO be automatically construed as a force majeure event?

Answer: 

a. No. It will not be automatically be construed as a force majeure event unless it is expressly stated in the contract.

b. The scope and effect of a force majeure clause depends on its wordings and to be determined on a case by case basis.

c. For instance, force majeure clause which uses wordings such as “epidemic”, “pandemics”, or “disease” would apply to Covid-19.

d. In addition, force majeure clause which covers “governmental action” may likely be applicable given the implementation of the MCO by the Government of Malaysia.

Q8. What can contractors do when there is a force majeure clause which appears to have covered the Covid-19?

Answer: 

a. The contractors should ascertain whether there is any specific condition to be fulfilled in order to invoke such clause.

b. Typical condition would be the requirement of notice. If there is such requirement to give notice, the same has to be fulfilled in order to be able to rely on such clause.

Q9. What are the typical consequences if a force majeure clause is successfully invoked? 

Answer: 

The consequences would usually be provided in the clause itself. For instance, the typical consequences would be as follows: –

a. Extension of time would be granted in accordance with the contract;

b. The contracting parties would be entitled to suspend performance while the force majeure event continues;

c. The non-performing party would not be liable for the non-performance or delay in performance while the force majeure event continues;

d. There is an express or implied obligation to mitigate, whereby the party seeking to rely on the clause must show that it has taken all possible steps to avoid the event or the impact of its consequences;

e. In some contracts, loss and expense claim would be allowed;

f. A right to terminate the contract if the force majeure event continues for a specified period.

Q10. Does Covid-19 and/ or the MCO constitute a force majeure event under PAM contract 2006?

Answer: 

a. Yes.

b. Clause 23.8 (a) of the PAM contract 2006 provides for the force majeure as one of the “Relevant Events” referred to in Clause 23 which entitles the contractor to apply for an extension of time if the Contractor is of the opinion that the completion of works is or will be delayed beyond the Completion Date.

c. Force majeure is defined in Article 7 (ad) of the PAM Contract 2006 as “any circumstances beyond the control of the Contractor caused by terrorist acts, governmental or regulatory action, epidemics and natural disasters.”

d. Since Covid-19 has been recognized globally as pandemic, it is very likely to be regarded as force majeure event as such definition of force majeure in Article 7 (ad) covers epidemics.

e. In addition to that, the imposition of MCO by the Government of Malaysia is also caught under definition of force majeure in Article 7 (ad) of the PAM Contract 2006 as governmental or regulatory action.

f. Pursuant to the definition of force majeure in Article 7 (ad) of the PAM Contract 2006, the Contractor would be entitled to apply for extension of time under Clause 23.8(a) of the PAM Contract 2006.

Q11. What is the contractor’s entitlement under the PAM contract 2006 in view of Covid-19 and/ or the implementation of MCO?

Answer:

Since Covid-19 and/ or implementation of MCO is a force majeure event under PAM contract 2006, the contractor is entitled to apply for extension of time under Clause 23.8 of the PAM Contract 2006 provided that the contractor fulfils the notice requirement provided under Clause 23.1 of the PAM Contract 2006.

Q12. Can contractors claim for loss and expense incurred if Covid-19 and/ or MCO is successfully invoked as a force majeure event under PAM contract 2006 which lead to an Extension of Time? 

Answer:

No. PAM contract 2006 provides for the rights to claim for loss and/ or expense if the regular progress of the works has been or is likely to be materially affected by any of the matters expressly referred to in Clause 24.3 of the PAM contract 2006. However, force majeure is not being listed as one of the events in Clause 24.3 of the PAM contract 2006.

Q13.Does Covid-19 and/or the MCO constitute a force majeure event under P.W.D. Form 203A (Rev 2007) standard form? 

Answer: 

a. Despite P.W.D. Form 203A (Rev 2007) contract has provided a list of events of force majeure in Clause 57.2, it is to be noted that Covid-19 and the MCO do not fall within the force majeure events.

b. However, the Ministry of Finance has on 21st March 2020 issued a Frequently Asked Questions (FAQs) and stated that Covid-19 falls within the force majeure clause under PWD form. (see FAQ 1 at page 2)

Q14. What is the contractor’s entitlement under the P.W.D. Form 203A (Rev 2007) contract in relation to Covid-19 and/ or the implementation of MCO?

Answer: 

a. The contractor could apply for extension of time under Clause 43 of the P.W.D. Form 203A (Rev 2007).

b. Pursuant to Clause 57.3 of the P.W.D. Form 203A (Rev 2007), the party who is unable to perform its obligation under the contract due to an event of force majeure, that party is required to inform the other party immediately of the occurrence of that event of force majeure with full particulars and consequences thereof.

c. The contractor shall also forthwith give written notice to the officer named in Appendix as to the causes of delay and the relevant information with supporting documents in order for the officer to determine the length of delay and grant the appropriate Extension of Time to the contractor pursuant to Clause 43.1 of the P.W.D. Form 203A (Rev 2007).

Q15. Can contractors claim for loss and expense incurred if Covid-19 and/ or MCO is successfully invoked as a force majeure event under the P.W.D. Form 203A (Rev 2007) standard form which lead to an Extension of Time? 

Answer: 

a. No. Contractors are not entitled to claim for loss and expense as Clause 44.1 of the PWD contract on the claims for loss and expense does not cover claims arising from force majeure.

b. The Ministry of Works has also issued Frequently Asked Question (FAQs) which stated that the Government will not be liable for any losses and expenses due to the imposition of the MCO as the Covid-19 pandemic is beyond the Government’s control. (Refer to FAQ no. 6)

Q15. Can contractors claim for loss and expense incurred if Covid-19 and/ or MCO is successfully invoked as a force majeure event under the P.W.D. Form 203A (Rev 2007) standard form which lead to an Extension of Time? 

Answer: 

a. No. Contractors are not entitled to claim for loss and expense as Clause 44.1 of the PWD contract on the claims for loss and expense does not cover claims arising from force majeure.

b. The Ministry of Works has also issued Frequently Asked Question (FAQs) which stated that the Government will not be liable for any losses and expenses due to the imposition of the MCO as the Covid-19 pandemic is beyond the Government’s control. (Refer to FAQ no. 6)

Q16. What if there is no force majeure clause in the construction contract?

Answer: 

In the absence of force majeure clause in the contract, the contracting parties may seek to rely on the Doctrine of Frustration of contract as provided under Section 57(2) of the Contracts Act 1950.

Q17. What is doctrine of frustration?

Answer: 

a. Doctrine of frustration is provided in Section 57(2) of the Contracts Act 1950 where it states that:

“A contract to do an act which, after the contract is made, becomes impossible, or by reason of some event which the promisor could not prevent, unlawful, becomes void when the act becomes impossible or unlawful.”

b. When a contract is frustrated, the performance of the contract ends permanently.

Q18. Would Covid-19 and/ or the implementation of MCO constitute an event which will lead to frustration of the construction contract? 

Answer: 

a. In order to rely on Section 57 (2) of the Contracts Act 1950, the contracting party must fulfil the elements as set out in the case of Guan Aik Moh (KL) Sdn Bhd & Anor v Selangor Properties Bhd [2007] 4 MLJ 20 as follows: 

i. The event upon which the promisor relies as having frustrated the contract must have been one for which no provision has been made in the contract. If provision has been made, then the parties must be taken to have allocated the risk between them.

ii. The event relied upon by the promisor must be one for which he or she is not responsible. Self induced frustration is ineffective.

iii. The event which is said to discharge the promise must be such that renders it radically different from that which was undertaken by the contract. The court must find it practically unjust to enforce the original promise.

b. It should be noted that a contract is not frustrated merely because it becomes difficult to perform (see Pacific Forest Industries Sdn Bhd & Anor v Lin Wen-Chih & Anor[2009] 6 CLJ 430).

c. In view of the implementation of MCO and when the contract does not provide for such event, the first element as stated above would be satisfied. The second element would also be satisfied as no party to the contract was responsible for MCO. However, the party to the contract has to satisfy the third element where such party would have to prove that MCO has rendered the contractual obligation radically different from which was undertaken by the contract and unjust to enforce it.

d. With the possibility of the MCO being extended and with more and more business are able to resume businesses, it remains uncertain whether the doctrine of frustration could be relied on for MCO which is temporary in nature.

e. However, if the MCO is being extended and those businesses which are still being prohibited to operate, may seek to rely on such doctrine if such party could prove that its contractual obligations have become radically different from what was undertaken by the contract.

THIS FAQS ARE PREPARED AND PUBLISHED BY MESSRS GAN & ZUL, ADVOCATES & SOLICITORS, KUALA LUMPUR.-CONSTRUCTION & ALTERNATIVE DISPUTE RESOLUTION DIVISION-