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27 April 2020
Force majeure is a creature of contract
Force majeure clause in standard form of construction contracts
How does COVID-19 or MCO affect contractual provisions?
EOT notice requirements
Claim for additional loss and expense incurred due to force majeure event?
In its effort to contain the COVID-19 outbreak, the government implemented the Movement Control Order (MCO) throughout Malaysia from 18 March 2020 to 31 March 2020, which was then extended to 28 April 2020 (the relevant period). The MCO has affected the performance of non-essential works, including works at project and construction sites where workers are required to stop work during the relevant period. Whether the COVID-19 outbreak or the consequential MCO constitutes a force majeure event is a matter of interpretation of the provisions of the contract. Similarly, how the outbreak or the MCO affects the rights and obligations of the parties in terms of timing and costs is much dependant on the provisions of the contract.
This article focuses on the following standard forms of construction contract commonly adopted in Malaysia:
Subject to the wordings of the relevant clause, force majeure is commonly referred to in most of the standard form of construction contracts as the occurrence of an event beyond the control of the parties which prevents one or all of them from fulfilling their contractual obligations. There is no general rule as to what constitutes force majeure, but 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 have agreed in their contract.(1)
In other words, a force majeure clause is a creature of contract. It will not ordinarily be implied into contracts governed by Malaysian law. Nonetheless, Section 57(2) of the Contracts Act 1950 recognises the doctrine of frustration rendering a contract void if performance of the contractual obligations becomes impossible or by reason of some event, performance is impossible or unlawful.(2) The test is whether the supervening event resulted in changed circumstances which in turn renders a fundamental or radical change in the obligation originally undertaken to make the performance of the contract impossible(3) or unlawful.
The PWD Form has a force majeure clause that sets out a list of events which trigger the application of the clause. It appears that the COVID-19 outbreak and the MCO do not fall within the list of events expressly provided under Clause 57.2 and the said clause appears to be an exhaustive list.
Notwithstanding this, the Malaysian Ministry of Finance in its series of frequently asked questions (FAQs) has expressed that the COVID-19 outbreak falls within the force majeure clause under the PWD Form and further provided that for those contracts without a force majeure clause, the Malaysian government would still be able to use the "principle and procedure of force majeure" to deal with the issue of delay to the programme or project.(4) For contracts with a force majeure clause, the government may interpret the same to be a non-exhaustive list of events and, therefore, either party is able to rely on it.
At present, there are no reported decisions in Malaysia that determine whether the force majeure events listed in the PWD Form are exhaustive. Some commentators have indicated that interpretation of force majeure under the PWD Form is likely to be restrictive because similar matters, which would typically constitute force majeure, are already expressly dealt with as an "event of force majeure".
The PAM Form defines 'force majeure' as "any circumstances beyond the control of the Contractor caused by, [among others,] epidemics".(5) The COVID-19 outbreak, which has been declared a global pandemic, is likely to be regarded under such contract as a force majeure situation.
The AIAC Form and the FIDIC Red Book have similar definitions for 'force majeure'. Essentially, a force majeure event(6) or an 'exceptional event'(7) (the term used in the FIDIC Red Book) is defined as an event or circumstance which:
The relevant clauses in both standard forms provide a non-exhaustive list of events with the qualification that the relevant force majeure or exceptional event must satisfy the above circumstances.
In any event, the burden to prove that the COVID-19 outbreak or the MCO falls within the definition of 'exceptional events' or 'force majeure' lies on the party seeking to rely on such clause.(8)
In most standard form of construction contracts, the occurrence of a force majeure event allows the affected party to apply for extension of time (EOT) to complete the works.
To apply for EOT, there are usually written notice requirements, requiring the affected party intending to rely on the force majeure event as a ground for EOT to give written notice to the other party within the stipulated time period. This is usually within a certain number of days after the occurrence of the force majeure event. There may be recurring written notice requirements. Failure to give prior written notice of the force majeure event may affect the affected party's EOT application.
The Ministry of Works has clarified in its updated list of FAQs(9) dated 1 April 2020 that, subject to obtaining the necessary recommendation(10) and authorities' approval, critical works may be carried out during the relevant period. 'Critical works'(11) are essentially works which, if left unfinished, will cause harm. Nonetheless, if performance of critical works during the relevant period is recommended and approved, but completion of such critical works was late, whether EOT will be granted by reason of disruptions and delay attributable to the pandemic or the MCO remains a question of both fact and law.
Under the PWD Form, if a party (usually the contractor) is unable to perform its obligation under the contract because of a force majeure event, it must immediately inform the other party of the occurrence of the same with full particulars and consequences thereof.(12) The contractor must also immediately provide a written notice to the superintending officer as to the causes of delay and the relevant information with supporting documents so that the officer can determine the length of delay and grant the appropriate EOT to the contractor.(13)
The PAM Form and the AIAC Form have similar notice requirements. The contractor must, within 28 days from the commencement of the event, give written notice to the architect of its intention to claim for EOT together with the initial estimate of EOT and particulars of the cause of delay.(14) The PAM Form also expressly states that such written notice is a condition precedent to the contractor's entitlement of EOT.(15) Thereafter, within 28 days of the end of the cause of delay, the contractor must send to the architect the particulars of its EOT claims together with the necessary calculations and documents to substantiate the same.(16) If the contractor fails to submit such particulars to the architect, it will be deemed to have assessed that the cause of the delay will not delay the completion of the works.(17)
Under the FIDIC Red Book, the consequences of an exceptional event have been expressly set out and this includes granting EOT to the affected party,(18) provided notice of exceptional event has been given. The affected party must give notice to the other party of the exceptional events and specify the obligations, the performance of which is or will be prevented.(19) The notice must be given within 14 days after the affected party became aware or should have become aware of the exceptional event. If the exceptional event has a continuing effect, the affected party must give further notices describing the effect every 28 days after the first notice.(20) The affected party is also required to give notice when it ceases to be affected by the exceptional event. If the affected party fails to do so, the other party may give notice to the affected party stating that the other party considers that the affected party's performance is no longer prevented by the exceptional event, with reasons.(21)
Some of the standard forms provide that neither party will be liable for any losses or expenses incurred by the affected party. If that has been agreed by the parties, the affected party must bear its own losses and expenses incurred arising from the COVID-19 pandemic or the MCO. If the contract allows an affected party to claim for any losses or expenses incurred, the affected party must ensure that it complies with all notification and other procedural requirements stipulated in the contract to ensure that its contractual right to claim such losses or expenses is not inadvertently prejudiced.
Under the PWD Form and the AIAC Form, contractors are not entitled to claim for any losses or expenses arising from force majeure events.(22) This is consistent with the Ministry of Works' FAQs, which state that the government will not be liable for any losses and expenses due to the implementation of the MCO, as the COVID-19 pandemic is beyond the government's control. This will be particularly relevant to government projects.(23)
The PAM Form provides for the right to claim for costs if the progress of the works is affected by the events listed,(24) which list does not include 'force majeure' as defined in the PAM Form. It is silent as to whether the affected party is entitled to claim for costs incurred due to force majeure events.
The FIDIC Red Book has significant wordings on the right to claim for costs incurred arising from exceptional events, expressly entitling the affected party to costs only if the exceptional events fall within the five (out of six) exceptional events listed which do not include pandemic or epidemic outbreaks and within the limited circumstances as further prescribed therein.(25) Similar to the PAM Form, the relevant clause is silent as to the party's financial remedy if the exceptional event is one which falls within the definition of 'exceptional events' but does not fall within any of the listed categories, although such event may still entitle the affected party to an entitlement to EOT.
Under the PWD Form, if either party considers that the force majeure event is so severe or continuing for such a period that it effectively frustrates the original intention of the contract, the parties can mutually terminate the same.(26) In such circumstance, neither party will have a claim against or be liable to the other, except for rights and liabilities accruing prior to the force majeure event.(27) If there is prolonged uncertainty caused by COVID-19, it would be interesting to see whether the government will exercise its unilateral right under the PWD Form to terminate the contract on grounds of national interest by giving no less than 30 days' written notice to the contractor,(28) or seek a mutual termination of the contract due to a force majeure event. The consequences of termination due to national interest is that the payment obligations including all costs and expenditure incurred by the government and the contractor will be ascertained according to Clause 54 and other consequences of termination will follow Clauses 51.1(c)(i), 51.1(c)(ii)(B) and 51.1(c)(ii)(C).
Under the AIAC Form and the PAM Form, the parties have no contractual right to mutually terminate the contract on account of force majeure. Nevertheless, the parties can still agree to terminate the contract, but the consequences of termination must be discussed and agreed between the parties.
The FIDIC Red Book provides that either party may terminate the works if the execution or performance of such works is prevented for a continuous period of 84 days or for multiple periods which total more than 140 days by reason of exceptional event of which notice has been duly given.(29) Parties should exercise this right with considerable caution to avoid being liable for wrongful or unlawful termination.
Parties to construction contracts should:
In the meantime, affected parties must mitigate their losses and expenses.(30) The burden of proof is on affected parties to show that they have taken reasonable steps to lessen the effect of the force majeure event.
For further information on this topic please contact Shannon Rajan or Jocelyn Yean Tse Lim at SKRINE by telephone (+60 3 2081 3999) or email (email@example.com or firstname.lastname@example.org). The SKRINE website can be accessed at www.skrine.com.
An earlier version of this article was published in Skrine's "COVID-19 Legal Updates & Guidance".
(1) See the Singapore case of Magenta Resources (S) Pte Ltd v China Resources (S) Pte Ltd ( 3 SLR 62), quoted in the Malaysian case of Muhammad Radhieddeen bin Abdul Khalid v Saujana Triangle Sdn Bhd ( 1 LNS 841).
(2) "COVID-19: Is it a Force Majeure Event or Ground for Frustration of Contract" is available here.
(4) See FAQ 1 at page 2 of the FAQs. The full text of the FAQs issued by the Ministry of Finance in the official language of Malaysia is available here.
(23) See FAQ 6. The full text of the FAQs issued by the Ministry of Works is available here.
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