The COVID-19 outbreak worldwide has been a bane to the construction industry in Malaysia.
Firstly, the Movement Control Order (“MCO”) imposed by the Malaysian Government has instantly halted ongoing construction works nationwide. The MCO was first announced on 16 March 2020 and it was to take effect from 18 March 2020 to 31 March 2020. It was then extended to 14 April 2020.
Secondly, even prior to the MCO, many construction projects were already facing potential setbacks to progress in the form of (a) disruption in supply of imported materials and (b) difficulty in securing manpower due to travel restrictions or post-travel quarantine. With “COVID-19” having only entered the global lexicon in late 2019, dealing with delays resulting from the outbreak is a novel issue for most projects.
The starting point is to assess whether the terms of the relevant construction contract, in particular “force majeure” clauses (i.e. clauses which deal with events which parties have no control over that might impede or obstruct performance of the contract) (if they exist in the contract), are sufficiently worded to provide for (a) the outbreak and (b) the MCO. If the contract does not contain clauses to govern such situations, such clauses generally will not be read into the contract and consequently, parties cannot use the outbreak or the MCO as an excuse for any delay.
Most standard forms of contract used in Malaysia contain “force majeure” clauses which provide for events that, amongst others, justify an extension of time for completion of the works.
Certain standard forms of contracts contain clauses which expressly contemplate the occurrence of an “epidemic” as such an event, namely the FIDIC Red Book (1999 ed.) [Clause 8.4(d) for “Unforeseeable shortages in the availability of personnel or Goods caused by epidemic …”], the FIDIC Silver Book (2017 ed.) [Clause 8.5(c) for “Unforeseeable shortages in the availability of Employer-Supplied Materials caused by epidemic …”] and the PAM Contract (both 2006 ed. and 2018 ed.) [Clause 23.8(a) read together with Article 7(ad)]. Whilst the word “epidemic” is not defined in these contracts, it may be argued that such clauses would be applicable to the COVID-19 outbreak (though classified as a pandemic) and the resulting MCO. In the FIDIC Silver Book (2017 ed.), the phrase “exceptional event” [Clause 18] is used instead of “force majeure”.
As for other standard forms of contract that do not provide for epidemics, the applicability of the “force majeure” clause to the outbreak depends on whether such clause is exhaustive.
The PWD Form 203A (Rev1/2010), on the other hand, provides for an exhaustive list of “force majeure” events (Clause 58.2) including “natural catastrophe”, which may be argued, albeit with some difficulty, to encompass the COVID-19 outbreak.
Further, it is arguable that the imposition of the MCO may be regarded as a form of “governmental action”, which is contemplated as a “force majeure” event in contract forms such as the FIDIC Red Book (1999 ed.) [Clause 8.4(d) for “Unforeseeable shortages in the availability of personnel or Goods caused by … governmental actions”], the FIDIC Silver Book (2017 ed.) [Clause 8.5(c) for “Unforeseeable shortages in the availability of Employer-Supplied Materials caused by … governmental actions”] and the PAM Contract (both 2006 and 2018 ed.) [Clause 23.8(a) read together with Article 7(ad)].
Most standard forms of contract require the mitigation of losses or for steps taken to reduce or prevent delay as one of the conditions for the reliance on either the “force majeure” or “extension of time” provision. In the context of the MCO, it may be, for example, reasonable to expect parties to attend to certain obligations which can be carried out off-site and from home.
Extension of Time
There are requirements and procedure for an application for “extension of time” which must generally be observed strictly. In this regard, most standard forms of contract require, amongst others, the giving of notice of the delaying event within a stipulated time.
Thus, in light of the MCO, parties would need to pay extra attention to the time frame and mode for giving such notice under the contract.
Further, a party who intends to rely on COVID-19 outbreak and MCO as constituting a “force majeure” event should immediately consider the requirements under the applicable contract as they vary from one to another.
The PWD Form 203A (Rev1/2010) requires the party seeking to rely on the “force majeure” provision to inform the other party “immediately of the occurrence of that event of force majeure with full particulars thereof and the consequences thereof.” (Clause 58.3).
The FIDIC Red Book (1999 ed.) requires the party seeking to rely on the “force majeure” provision to give notice to the other party “within 14 days” after the party became aware or should have become aware of the relevant event or circumstance constituting force majeure and “shall specify the obligations, the performance of which is or will be prevented.” (Clause 19.2).
The FIDIC Silver Book (2017 ed.) requires the party seeking to rely on the “exceptional event” provision to inform the other party “within 14 days” after the affected party became aware or should have become aware of the exceptional event and “shall specify the obligations, the performance of which is or will be prevented.” (Clause 18.2).
The PAM Contract (both 2006 and 2018 ed.) requires the party seeking to rely on the “force majeure” event in respect of a claim for extension of time to, amongst others, “give written notice to the Architect of his intention to claim for such extension of time together with an initial estimate of the extension of time he may require supported with all particulars of the cause of delay” and such notice must be given “within 28 days” from the date of commencement of the “force majeure” event (Clause 23.1).
Doctrine of Frustration
Where a contract does not contain any applicable provisions to the outbreak or the MCO, an issue that may arise is the “doctrine of frustration” under section 57 of the Contracts Act 1950. Under this doctrine, a contract may be discharged altogether if it can be shown that the COVID-19 outbreak has rendered the contract incapable of being performed.
However, case law suggests that a temporary event which merely delays performance of the contract may be insufficient to trigger frustration. Thus, the MCO, which will last for about a month (as at the time of writing), may not be radical enough to frustrate major construction contracts. However, should the outbreak worsen and cause works to be suspended indefinitely, frustration may apply where it is practically unjust to enforce the contract.
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|Lam Ko Luen