Movement Control Order: FAQ On Contracts

The Movement Control Order (“MCO“) has forced many businesses to shut down temporarily, and many contracts could not be proceeded due to this movement restriction.

This has raised concerns to businesses, as there may be a disruption in the supply chain, closure of office premises, or an inability to make delivery of certain products. In this article, we will answer some common questions on contract law relating to this MCO:

1. My business has to shut down during the MCO, what can I do if I can’t perform my contractual duties?

Firstly, you need to review your contracts, purchase orders etc. to ascertain if they contain any clause which allows you to temporarily suspend, or even terminate your contractual obligations when an unforeseen circumstance occur. This is commonly known as a “force majeure clause”.

2. What is a force majeure clause?

Here’s an example of a force majeure clause in a supplier agreement:

“The seller shall not be held liable for any delay or failure in performance of any part of this agreement by reason of any cause beyond its reasonable control, including, but not limited to, acts of god, acts or ommissions of any government or any rules, regulations or orders of any governmental authority or any officer, fire, storm, flood, earthquake, accident, acts of war, rebellion, insurrection, riot, invasion, strikes, industrial disputes or lockouts, or anything regarded as being beyond the control of the seller in question.”

If you want to rely on a force majeure clause, you have to prove that an event has occurred which is beyond your reasonable control, and it has caused a delay or inability to fulfill your obligations under the contract. By invoking this clause, you may relieve yourself from the performance of contractual obligations totally or for a specific period, as provided in the contract.

3. If my contract has a force majeure clause, am I automatically entitled to invoke it for this Covid-19 lockdown?

No, you can only invoke the force majeure clause if it covers the Covid-19 outbreak.

The scope and effect of a force majeure clause depends on the wordings of the clause. For instance, force majeure clauses which use terms such as “pandamics”, “governmental action” “lockdown” may be sufficient to cover the current MCO period.

However, terms like “Act of God” is arguably insufficient. To show that there is an “Act of God”, you have to prove that the MCO [1]:   

• is an accident due to natural causes, directly and exclusively without human intervention;
• could not have been reasonably foreseen; and
• could not have been guarded against by the parties.

The Courts will interpret the force majeure clause together with the other provisions in the contract, and the circumstances of the case. The Courts will also consider whether you have taken reasonable steps to reduce the impact of the situation before allowing you to invoke the force majeure clause.

4. My contract has a force majeure clause which appears to include the outbreak. What should I do next?

First, read the contract. It may set out what you should do when there is a force majeure event. If the provision says that you should notify the counterparty promptly in writing, you have to do so immediately.

However, if your contact does not specify what you do next, as a general rule, you should inform the other party in a timely manner. In doing so, you should give an explanation as to why you cannot perform your part in the contract, and what steps have you taken to mitigate the force majeure event.

5. What if there is no force majeure clause that covers the Covid-19 outbreak?

In the absence of a force majeure clause, you may rely on the doctrine of frustration. This is provided under Section 57 of the Contracts Act 1950:

“Agreement to do impossible act

57(2) 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.”

This section states that a contract is void, or invalid, if the performance of contract becomes impossible or illegal due to a subsequent event. When a contract is void, both contracting parties will be put in a position as if the contract has never been entered.

With the enforcement of the MCO, many companies are forced to cease certain operations, and continuing to carry out the obligations may amount to a breach of the MCO. In such circumstances, it can be argued that the performance of contract is legally impossible, and therefore the contract is frustrated and invalid.

It is always the party seeking to rely on this doctrine to prove that the contract has become impossible or unlawful to perform. The fact that the contract becomes harder, or more expensive to perform it insufficient to prove that it is ‘frustrated”.

Reference: 

1. Kuok Ling Timber Industries Sdn Bhd v The Owners of and Other Persons In The Vessel ‘MV Thonfullin’ [2000] 2 MLJ 615

Disclaimer: The above article is intended for general informational and education purposes only and not for the purpose of providing legal and professional advice. Need further information? Contact members of Chern & Co. at info@chernco.com.my.