The outbreak of the corona virus (“COVID-19”) which has been regarded as a pandemic by the World Health Organisation (WHO) is spreading rapidly in countries around the world. As the pandemic continues to spread, Malaysia is one of the countries which has been seriously affected. Malaysia is now scrambling protective and preventive measures against this pandemic by imposing, inter alia, movement lockdown. Clearly such measures would cause substantial and significant impacts on businesses as well as the economy.
As a result of this difficult situation, what one may note is that some companies including importers, exporters, suppliers, manufacturers and others have no alternative but to pause their business operations and some have even begun to declare Force Majeure (“FM”) events due to this unprecedented outbreak.
This brings us to the crucial question as to whether an FM clause in a contract can be invoked to relieve a party/ies from performing its/their obligations amid the COVID-19 outbreak.
As a rule, an FM clause is generally enforceable but rather difficult to be invoked in order to stop a party/ies to a contract in performing its/their contractual obligations. The act of invoking an FM does not guarantee that the party invoking it will be protected against the claim of breach of contract.
There are certain considerations required to be taken into account before one may invoke FM under a contract. Some of the conditions are as follows:
FM can only be invoked provided that an FM clause is expressly stated in the contract;
Even if the contract has clearly provided an FM clause, it does not guarantee that the party would be able to rely on the said clause due to the COVID-19 outbreak. This is because, courts may take a strict approach in interpreting the terms of the said clause.
The party relying on the FM clause would be required to prove the followings:
that the FM event has occurred and it was beyond their control;
due to the FM event, the party was not able to perform its obligation under the contract i.e their performance of obligation is prevented, hindered or delayed; and
that they have taken every necessary and reasonable steps to prevent, avoid or mitigate the FM event or its consequences.
Based on the above conditions, in order to determine whether or not COVID-19 falls under an FM event, the terms of the contract has to be read carefully. Some FM clauses do not specifically define an FM event; what more the novel Covid-19. Thus, in this situation, one must attentively examine the terms set out in the contract.
Moving on to the issue on how the COVID-19 virus has prevented, hindered or delayed the performance of the party’s obligation under the contract. In establishing this, courts will have to look into how the FM event has affected the party’s performance of obligations under the contract. In addressing the current situation, the English court has set a clear precedent whereby it is not sufficient to allow either party to invoke an FM clause under a contract simply because it has become more expensive and/or uneconomic to perform certain obligations. In this instance, it is most likely that the Malaysian courts would adopt similar principles.
Further to the above, there are other circumstances to be considered before one may invoke an FM clause, for instance, whether or not the FM event affects the party’s performance of obligation under the contract. Apart from that, it is worth noting that the question ‘what if other companies carrying similar businesses are able to continue operation despite the outbreak’, will inevitably surface.
Clearly, the above factors need to be taken into account before invoking an FM clause as it will give rise to various consequences including the fulfilment of other terms under the contract and/or costs incurred as a result of the application of the clause, for example, quarantine costs, losses and etc.
Additionally, it must be mentioned that in invoking an FM clause, a form of evidence containing notice of provisions, which complies with the clause, is required to be served in order to support any claim that may arise. This is crucial as there are cases where FM claims have been rejected by the courts due to the non-compliance with the notice of provisions served.
It is important to appreciate the effect of invoking an FM clause on a contract. In the event that a party has successfully invoked the said clause, performance of the obligation of that party would be temporarily suspended while the other party will not be able to terminate the contract. In other words, invoking an FM clause will not end a contract. Once the FM event has come to an end, performance of obligations under the contract shall resume as per usual.
However, there are circumstances where the declaration of FM by one party would entitle the other party to terminate a contract. As such, due care should be practiced before invoking an FM clause.
In light of the above, there is no doubt that disputes in relation to the declaration of FM arising from the impact of this horrifying pandemic is inevitable.
For further advice on the above, you may contact Cik Zahia at 03-2171 1484 or at email@example.com.