Is Covid-19 A Force Majeure Event?
Published on 20 April 2020 by Ashvinpal Kaur
Global pandemic Covid-19 has impacted the ability of businesses to maintain operations and fulfil existing contractual obligations. Contracting parties may seek relief for or from obligations which were not performed due to the impacts of Covid-19.
Contracting parties are to consider whether they can terminate or suspend their contractual obligations as a result of Covid-19 by means of a force majeure clause or the doctrine of frustration.
“Force majeure” events refer to events which are beyond the control of the parties, such as “pandemics,” “epidemics” or “diseases that are unforeseeable and prevents one or both parties from fulfilling their obligations under the contract. It is likely that Covid-19 would constitute a force majeure event within the ambit of “Act of God,” and/or “action by government” and/or “outside the reasonable control of the party affected”.
Parties can rely on the force majeure relief if it is expressly provided in the contract. If there is no express force majeure clause in the contract, parties may rely on the doctrine of frustration under Section 57(2) of the Contracts Act 1950 in the event there is a change in circumstances which result in a fundamental change in any obligation originally undertaken by the parties to a contract.
Covid-19: Is It A Force Majeure Event?
The World Health Organization declared Covid-19 to be a pandemic on 11 March 2020 following the rapid spread of the novel coronavirus that was first reported in Wuhan, China at the end of 2019. The Movement Control Order (MCO) by the government of Malaysia to curb the spread of Covid-19 has seriously impacted businesses and commercial arrangements across the country.
Necessary quarantine measures have drastically disrupted supply chains. Sales and consumer confidence have declined markedly. International trade and travel have also reduced considerably.
Amid this, commercial sectors are looking to rely upon force majeure provisions in their contracts to either temporarily suspend their performance obligations under the contracts and protect themselves against failures to deliver goods or perform services, or even to wholly terminate their contractual arrangements.
On this note, we consider how force majeure provisions in commercial contracts and the related doctrine of frustration may be engaged in the context of the Covid-19 outbreak as guidance for businesses during these difficult times.
Force Majeure Provisions
Under Malaysian law, there is no generally applicable concept of “force majeure”; however, there is nothing in Malaysian law that prohibits parties from providing for force majeure events, i.e., that certain external events may have the effect of suspending contractual performance or releasing the parties from performance altogether.
Events Capable of Constituting Force Majeure
First, they must be unforeseeable which affected or prevented the party’s ability to perform its obligations. The events must be beyond their control and one must have taken all reasonable steps to seek to avoid or mitigate the events or their consequences.
The Event – Covid-19 and Movement Control Order
Many contractual provisions set out a specific list of force majeure events which are deemed to be events of force majeure beyond the control of the parties, such as “pandemics,” “epidemics” or “diseases.” A specific reference to a “pandemic” will make it easier to bring a force majeure claim but will still require the other criteria for a force majeure test to be satisfied.
However, if the provision does not include language to that effect, then it will be necessary to consider whether Covid-19, or its impact on a business or a project, is captured by a different concept, such as an “Act of God,” “action by government” or a catch-all provision. Most force majeure provisions contain “catch-all” language in respect of events which are “outside the reasonable control of the party affected”.
Given the almost unprecedented nature of the Covid-19 outbreak and/or in light of the MCO, it is likely that Covid-19 would constitute a force majeure event within the ambit of “outside the reasonable control of the party affected” as the parties have no control whatsoever on the occurrenceand spreading of Covid-19 and/or the government’s imposition of the MCO.
It is important to bear in mind however that the relevant force majeure event need not be Covid-19 itself. It is the consequences of Covid-19 and its impact upon the ability of the affected party to fulfil its contractual obligations that will be relevant.
While the concept of force majeure encompasses dislocation of business by various actions and events, it does not include conditions of business or economic climate leading to a depressed economy (see, Global Destar (M) Sdn Bhd v Kuala Lumpur Glass Manufacturers Co Sdn Bhd  MLJU 91;  1 LNS 54 ).
It is because the ups and downs of business or economic climate are part of the risk of doing business. The term force majeure is not intended to enable one party to renege upon its contract to take advantage of and profit from better deals available, but in this case to protect each party from laws or wars, strikes, lockdowns, breakdowns or other circumstances beyond the control of the party affected causing the party to be unable to perform such party’s part of the subject bargain.
Absence of Force Majeure Clause
A force majeure clause can only be invoked and relied upon where it is explicitly set out in a contract. Therefore, the parties cannot rely on force majeure when it is not available in the contract.
Doctrine of Frustration
In the absence of an express force majeure clause in the contract, parties may resort to the doctrine of frustration of contract. Section 57(2) of the Contracts Act 1950 recognizes the concept of frustration of contract in providing 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.”
Case law suggests that the concept of impossibility in the sub-section extends to circumstances where performance is radically different from that contracted for (see, APT Associates Sdn Bhd v Adnan Ishak & Ors  4 CLJ 277). It is clear that the fact that the contract has become more difficult or onerous to perform is insufficient for the doctrine to be invoked (see, Yee Seng Plantations Sdn Bhd v Kerajaan Negeri Terengganu & Ors 3 CLJ 666). The doctrine results in the contract being terminated automatically.
Doctrine of Frustration to be Applied Narrowly
The doctrine of frustration must be applied within very narrow limits (see, Tsakiroglou & Co Ltd v. Noblee Thorl GmbH  AC 93). A contract is not frustrated merely because it becomes difficult or more expensive to perform (see, Pacific Forest Industries Sdn Bhd v Lin Wen-Chih  6 MLJ 293).
Businesses intending to claim frustration of contract in light of the MCO should do so with caution, and ensure that the MCO not only makes it difficult, inconvenient, or onerous to perform a contract, but that it renders the performance of a contract impossible.
Covid-19 – Will A Contract Be Frustrated?
It is uncertain whether the Covid-19 pandemic and its impact is able to frustrate contracts and this issue will be certainly be litigated through the courts to test its applicability on case to case basis.
The Way Forward
The precise impact of Covid-19 on many commercial contracts is presently uncertain. The specific wording of the force majeure clause will be critical. We recommend that you:-
- Review Your Existing Contracts - review your existing contracts to identify any potential commercial risks and the potential commercial impact of Covid-19;
- Look For A Force Majeure Clause – Review the force majeure clause in your contracts and consider whether or not it may apply;
- Analyse the Clause - If your contracts do have a force majeure clause, analyze whether a pandemic might constitute a force majeure event under the terms of the specific provision and then what effect this has on contractual obligations. This may require some amount of interpretation and potentially drawing similarities to previous cases. Engaging legal counsel in this initial stage may be crucial to acting efficiently and decisively to make the best possible arguments that performance is excused;
- Notice – Your contracts may require a notice to be issued within a specified period from when the affected party first became aware of the force majeure event, failure of which will result in a loss of entitlement to claim;
- Mitigate – Consider measures that may be taken to mitigate any potential consequences of Covid-19 in compliance with obligations under force majeure clauses (see, Holcim (Singapore) Pte Ltd v. Precise Development Pte Ltd  2 SLR 106);
- Communicate Early and Effectively – Review the dispute resolution clause in your contracts and consider developing a commercial strategy to try to resolve disputes that may arise as a result of force majeure events;
- Doctrine of Frustration – If your contracts do not include a force majeure clause, consider whether the doctrine of frustration may apply; and
- Consider Amending Your Contract – Consider amending the force majeure clause to be incorporated into future contracts. Hiring a lawyer to help review and draft your agreement is the best.
Parties to an agreement may relieve themselves from performing their obligations by invoking the force majeure clause. However, the parties that do not have a force majeure clause in their contract may rely on the doctrine of frustration instead. Both the doctrine of frustration and force majeure reliefs can have profound impacts, so the exercise of these rights should be carefully assessed by the parties intending to invoke them. On this note, the unforeseeable disruptions resulting from Covid-19 are likely to influence how parties approach contractual negotiation and risk allocation in the future.
The contents of this article are not intended to constitute legal advice on any specific matter and should not be relied upon as a substitute for specific legal advice on matters or transactions.
For further information, please contact the author of this article.