Is COVID-19 or The Movement Control Order (“MCO”) A Force Majeure Event in Construction Contract?

Introduction

 ​​​The rampant spreading, rising cases and death tolls reported in many countries have forced the World Health Organization (‘WHO’) to declare the Coronavirus outbreak or COVID-19 as a public health emergency of international concern on 30 January 2020 and as a global pandemic on 11 March 2020. There is a genuine fear that the spread of COVID-19 will severely impact businesses, livelihood, and the global economic market.

In an effort to halt the escalation of the COVID-19 outbreak, the Malaysian Government has, on 16.03.2020, announced the implementation of the Movement Control Order ("MCO") throughout Malaysia which takes effect from 18.03.2020 to 31.03.2020 ("Restriction Period"). This Restriction Period has now been extended to 28.4.2020 (“Extended Restriction Period”).

Pursuant to the MCO, save for essential services, all other businesses were ordered to be closed. Under the definition of Essential Services provided for in Prevention and Control of Infectious Diseases (Measures within the Infected Local Areas) Regulations 2020 (“PCID Regulations 2020”), construction works did not form part of the same.

However, it was subsequently clarified through the FAQ issued by Kementerian Kerja Raya (“KKR”) on 18.03.2020 that only construction works of critical services are exempted from the MCO, i.e works involving slope, pothole repairs; traffic management control, periodical checks and repairs of lifts/travellators/ escalators and other critical mechanical and electrical equipment, traffic light repairs, construction of bailey bridge at location of any collapsed bridge, tunnelling works, other emergency works as specified under the contract, maintenance works, cleaning and drying of stagnant water, the spraying of insecticides at construction sites to prevent the breeding of Aedes mosquitoes and other pests, other works which, if not completed would result in danger.

It is, however, important to note that from 29.03.2020, exemptions will only be given to critical works involving maintenance works, cleaning and of stagnant water, the spraying of insecticides at construction sites to prevent the breeding of Aedes mosquitoes and other pests and to other works which if not completed, would result in danger.

Save for construction of critical works as illustrated above, the MCO requires the cessation of all construction works at all project sites in Malaysia. As a result, contractors will face severe difficulties in fulfilling their respective obligations for an indefinite period as the Extended Period may very well be prolonged even further.

Recently on 10.04.2020, the Ministry of International Trade and Industry Malaysia (“MITI”) has announced an additional list of sectors that can operate under the 3 of the MCO during the Extended Restriction Period subject to approval and health & safety protocols (processing period of 5 working days). This included the construction sector and the list of construction projects and services can be found on MITI’s website entitled “FAQ on MCO of Ministry of International Trade and Industry No.3”. 39 – 44 deals with FAQs on construction & building materials).

 

This article will deliberate on whether the COVID-19 outbreak and the MCO will be regarded as a Relevant Event, giving rise to an entitlement to claim for an extension of time and loss and expense in the following commonly adopted standard form contracts in Malaysia.

1. The Agreement and Conditions of the PAM Contract 2006;
2. The AIAC Standard Form of Building Contract (2019 Edition); and
3.  P.W.D. Form 203A (Rev. 2007).

WHAT IS FORCE MAJEURE?

Force majeure means a superior or an unforeseeable circumstance negating a party from fulfilling the terms of the contract.

It is trite that a force majeure clause is a creature of contract and thus will not be automatically implied by Malaysian law. Therefore, the rights and obligations that follow from the entitlements of a force majeure clause are purely within the autonomy of contracting parties preserving the notion of freedom of contract.

Since force majeure forms part of the risk allocation under a construction contract, emphasis must be given to the contractual wordings of the same as the impacts of such clause, may often vary depending on the forms of contract. Reference should be given to the Singaporean decision of Magenta Resources (S) Pte. Ltd. v China Resources (S) Pte. Ltd. [1996] 3 SLR 62 where Rajendran, J remarked that:

“What is referred to as force majeure in our law (as opposed to French law from which that term originates) is really no more than a convenient way of referring to contractual terms that the parties have agreed upon to deal with situations that might arise, over which the parties have little or no control, that might impede or obstruct the performance of the contact. There can, therefore, be no general rule as to what constitutes a situation of force majeure. 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, in their contract, have provided for.”

THE FORCE MAJEURE EVENT UNDER THE PAM CONTRACT 2006 AND ITS ENTITLEMENTS

Clause 23 of the PAM Contract 2006 entitles the contractor to apply for an extension of time if the completion of the Works is likely to be delayed beyond the Completion Date and if it can be shown that it was caused by any of the relevant events captured under Clause 23.8 (a – x) Now, the force majeure event is caught under Clause 23.8 (a) of the PAM Contract 2006 and the definition of a force majeure event is defined as follows:

“Article 7(ad) of the PAM Contract 2006 defines force majeure as: “Any circumstances beyond Contractor’s control caused by terrorist acts, governmental/regulatory action, epidemics and natural disasters”

In this regard, the COVID-19 outbreak which has been declared as a global pandemic is likely to be regarded under such contract as a force majeure event as the aforesaid clause governs epidemics. Further, governmental and or regulatory action could very well cover the effects of the implementation of the MCO. Therefore, by virtue of the aforesaid definition of force majeure in the PAM Contract 2006, contractors will be able to rely on clause 23.8(a) of PAM Contract 2006 to justify an entitlement for extension of time.

As an alternative to a force majeure event, pursuant to Clause 4.1 of the PAM Contract 2006, all contractors shall comply with and submit all notices required by any laws, regulations, by-laws, terms and conditions of any Appropriate Authority and Service Provider in respect of the execution of the Works. Now, if a stop work order has been issued by the appropriate authority or the Architect as result of the MCO, this may then provide the contractors another avenue to claim for an extension of time under Clause 23.8 (p), (w) and (g) of the PAM Contract 2006 respectively.

1. If a contractor relies on a force majeure event for an entitlement of EOT under the PAM Contract 2006, can the contractor correspondingly claim for loss and expense?

The answer is No.

The PAM Contract 2006 does not entitle a contractor to claim for loss and expense when a contractor is relying on a force majeure event for entitlement to an extension of time. A force majeure is an event that is beyond the control of both the Employer and the contractor and is generally unforeseen. Surely the Employer cannot be apportioned blame as such an event would not have been contemplated by the parties at the time the risk had been allocated.

2. In light of the MCO and/or the COVID-19 outbreak, are there other relevant events which may enable the contractor to claim for loss and expense?

The answer is Yes and they are as follows:

1. If there is written instruction by the Architect to suspend all works for a continuous period in light of COVID-19 and the MCO, the contractor may potentially be entitled for a claim for loss and expense (Clause 24.3 (c) of the PAM Contract 2006)

 

2. If there is a stop order and/or suspension order for the whole or part of the works issued by the Appropriate Authority in light of COVID-19 and the MCO, the contractor may potentially be entitled to for a claim for loss and expense (Clause 24.3 (n) of the PAM Contract 2006)

 

3. If the Employer refuses and/or fails to pay the Contractor the amount due as shown in the payment certificate (less any Liquidated Damages, in the event an extension of time is not given to the contractor by the Employer in light of COVID-19 and the MCO), the contractor may suspend its own works and potentially claim for loss and expense (Clause 24.3 (m) of the PAM Contract 2006 & Clause 30.7 of the PAM Contract 2006)

 

4. If the contract has been awarded to the contractor and the Employer was due to give site possession to the contractor in the course of the MCO, i.e 18.03.2020 to 14.04.2020, the Contractor shall be entitled to loss and expense as a result of the entitlement to an extension of time owing to a late site possession. (Clause 23.8(f) and 24.3(b) of the PAM Contract 2006)

 

5. If there is a delay in the Employer’s craftsmen or tradesmen which is a very real possibility owing to the economic downturn and disruption in the supply chain owing to the COVID-19 outbreak, this may very well hinder the contractor’s work progress. This will entitle the contractor to an extension of time and to a claim for loss and expense. (Clause 23.8 (j) and 24.3(d) of the PAM Contract 2006)

 

6. If there is a delay to the Employer’s material or goods which is a very real possibility owing to the economic downturn and disruption in the supply chain owing to the COVID-19 outbreak, this may very well hinder the contractor’s work progress. This entitles the Claimant to an extension of time and a claim for loss and expense. (Clause 23.8(k) and 24.3 (e) of the PAM Contract 2006)

THE FORCE MAJEURE EVENT UNDER THE AIAC STANDARD FORM CONTRACT 2019 (RED BOOK) AND ITS ENTITLEMENTS

Based on Clause 23.0 of the AIAC Standard Form Contract 2019 (Red Book) (“AIAC Standard Form Contract”), the Contractor is not only entitled to apply for an extension of time in situations where the works is likely to be delayed beyond the Completion period but to also situations where the progress of the works in itself is delayed at face-value.

Similarly, a contractor will be able to claim for an extension of time if it falls within the list of delaying events governed under 23.8 (i – xiv) of the AIAC Standard Form Contract. Similarly, the force majeure clause is defined under the AIAC Standard Form Contract as follows:

“Article 9.34 Force Majeure means an exceptional event or circumstance which:

(a) is beyond a Party’s control;

(b) such Party could not reasonably have provided against before entering into the Contract;

(c) having arisen, such Party could not reasonably have avoided or overcome; and

(d) is not substantially attributable to the other Party.

Force Majeure may include, but is not limited to, exceptional events or circumstances of the kind listed below, so long as conditions in Article 9.34(a) to (d) above are satisfied:

1. war, hostilities (whether war be declared or not), invasion, act of foreign enemies;
2. rebellion, terrorism, revolution, insurrection, military or usurped power, or civil war;
3. riot, commotion, disorder, strike or lockout by Persons other than the personnel, servants, agents, and employees of the Contractor and Sub Contractors;
4. munitions of war, explosive materials, ionizing radiation or contamination by radio-activity, except as may be attributable to the Contractor’s use of such munitions, explosives, radiation or radio-activity; and
5. natural catastrophe such as earthquakes, hurricane, typhoon or volcanic activity”

In this regard, from a reading of the definition of force majeure under the AIAC Standard Form Contract, the COVID-19 outbreak and the MCO satisfies the four conditions illustrated under Article 9.34 (a – d). Further, Article 9.34 (iii) does contemplate a lockout. While the AIAC Standard Form Contract does not provide for a definition of a lockout, from a reading of the Cambridge Dictionary, a lockout is “an occasion when an employer prevents workers from entering a workplace until they agree to particular conditions”. Therefore, the definition of a lockout embodies the similar effect of the MCO which prevents contractors from entering the construction site until the formal lifting of the MCO. On that note, the COVID-19 outbreak and the MCO would fall within a force majeure event under the AIAC Standard Form Contract.

Alternatively, a contractor may have the option of relying on Clause 23.8(b)(vii) which entitles a contractor to an extension of time should there be an “unforeseeable” change in law, regulations, by law and conditions of Any Appropriate Authority and/or Service Provider. While this may not apply to the outbreak of COVID-19, this would certainly apply to the implementation of the MCO. The definition of “unforeseeable” is defined under the AIAC Standard Form Contract as follows:

“Article 9.65 - Unforeseeable means not reasonably foreseeable by an experienced contractor by the date for submission of the Tender”

As Malaysia has not faced such an unprecedented cause for concern necessitating the implementation of the MCO, it surely cannot be the case that it had been reasonably foreseeable for the contractors to envisage the MCO at the date of tender save for tender documents drawn up post-COVID-19, i.e from January 2020 when COVID-19 was a live issue (foreseeability is the question of fact and degree and ultimately it is arguable). Therefore, this is a provision which is of direct relevance for the contractors to be entitled to an extension of time.

1. If a contractor relies on a force majeure event for an entitlement of EOT under the AIAC Standard Form Contract, can the contractor claim for loss and expense?

The answer is No. The AIAC Standard Form Contract segregates delay events caused by the Employer and Non-Employer (i.e. neutral events). As the occurrence of a force majeure is beyond the control of both the Employer and the contractor and falls within a neutral event, the contractor will not be able to claim for loss and expense.

2. In light of the MCO and/or the COVID-19 outbreak, are there any other relevant events which may enable the contractor to claim for loss and expense under the AIAC Standard Form Contract?

The answer is Yes, and they are as follows:

1. If there is a written instruction by the Appropriate Authority to suspend all works for a continuous period in light of COVID-19 and the MCO, the contractor may potentially be entitled for a claim for loss and expense (Clause 23.8(c)(xiv) of the AIAC Standard Form Contract). This event falls under an Employer’s event entitling the contractor to an extension of time thus further enabling the contractor to claim for loss and expense. While the Appropriate Authority by definition may mean any statutory authority having jurisdiction over the works, it is arguable that the implementation of the MCO to the construction industry may well have gone through the Appropriate Authorities.

 

2. If the contract has been awarded and the Employer was due to give site possession to the contractor in the course of the MCO, i.e 18.03.2020 to 14.04.2020, the Contractor shall be entitled to loss and expense as a result of the entitlement to extension of time owing to the late site possession. This falls under an Employer’s event entitling an extension of time thus further enabling the contractor to claim for loss and expense. (Clause 23.8(c)(ii) of the AIAC Standard Form Contract)

 

3. If there is a delay Employer’s craftsmen or tradesmen which is a very real possibility owing to the economic downturn and disruption in the supply chain owing to the COVID-19 outbreak, this may very well hinder the contractor’s work progress. This falls under an Employer’s event entitling an extension of time thus further enabling the contractor to claim for loss and expense. (Clause 23.8(c)(iv) of the AIAC Standard Form Contract)

 

4. If there is a delay to the Employer’s material or goods which is a very real possibility owing to the economic downturn and disruption in the supply chain owing to the COVID-19 outbreak, this may very well hinder the contractor’s work progress. This falls under an Employer’s event entitling an extension of time thus further enabling the contractor to claim for loss and expense. (Clause 23.8(c)(v) of the AIAC Standard Form Contract)

 

5. If there is a need for the Employer’s to appoint a replacement consultant which is a very real possibility owing to the economic downturn owing to the COVID-19 outbreak, this may very well hinder the contractor’s work progress. This falls under an Employer’s event entitling an extension of time thus further enabling the contractor to claim for loss and expense. (Clause 23.8(c)(ix) of the AIAC Standard Form Contract)

 

If the Employer refuses and/or fails to pay the Contractor the amount due as shown in the payment certificate (less any Liquidated Damages, in the event an extension of time is not given to the contractor by the Employer in light of COVID-19 and the MCO), the contractor may suspend its own works and potentially be entitled to claim for loss and expense. This falls under an Employer’s event entitling an extension of time thus further enabling the contractor to claim for loss and expense (Clause 23.8(c)(xiii) of the AIAC Standard Form Contract).

III. In light of the MCO and/or the COVID-19 outbreak, is the Contractor entitled to an EOT when the NSC or Nominated Suppliers delay in carrying out the Works?

The answer is Yes. Pursuant to Clause 23.8(b) (iv) the delay on the part of Nominated Sub-Contractors or Nominated Suppliers for the reasons as set out in Clause 19.6 of the Standard Form of Building Sub-Contract issued by the AIAC is a relevant event to claim for extension of time under the AIAC Standard Form Contract.

In light of the COVID-19 outbreak globally, it is a very real risk that there will be a disruption to the supply chain due to the economic downturn which may have a substantial financial effect on the nominated sub-contractors and suppliers.

4. If the NSC and or Nominated Supplier delays in carrying out the works and I am entitled to an EOT, can I claim for loss and expense?

The answer is No. The AIAC Standard Form Contract segregates delay events caused by the Employer and Non-Employer (i.e. neutral events). As the delay by a nominated sub-contractor and nominated supplier is beyond the control of both the Employer and the contractor, the contractor will not be able to claim for loss and expense.

THE FORCE MAJEURE EVENT UNDER THE PWD STANDARD FORM CONTRACT AND ITS ENTITLEMENTS

Clause 43 of the PWD Form 203 (Rev 1/2010) Contract (“PWD Contract”) entitles the contractor to apply for an extension if the completion of the Works is likely to be delayed beyond the Completion Date if it was caused by any of the events of delays captured under Clause 43.1 (a – j). Now a force majeure event is caught under Clause 43.1 (a) of the PWD Contract and the definition of a force majeure event is under the said clause as defined below:

Clause 57.2 of the PWD Contract defines an event of force majeure as an event beyond the control of both parties which are:

(a) War (whether declared or not), hostilities, invasion, act of foreign enemies;

(b) Insurrection, revolution, rebellion, military or usurped power, civil war, terrorism;

(c) Natural catastrophe including but not limited to earthquakes, floods,

subterranean spontaneous combustion or any operation of the forces of nature against which an experienced contractor could not reasonably have been expected to take precautions;

(d) Nuclear explosion, radioactive or chemical contamination or radiation (unless caused by the negligence act, omission or default of the Contractor, its agents or personnel);

5. Pressure waves caused by aircraft to other aerial devices travelling at sonic or supersonic speeds; and
6. riot, commotion or disorder, unless solely restricted to employees of the Contractor or its personnel, servants or agents

From a reading of Clause 57.2 of the PWD Contract, the COVID-19 outbreak and the MCO would not fall within a force majeure event under the PWD Contract. However, Clause 43.1(i) of the PWD Contract states that “the contractor’s inability for reason beyond his control and which he could not reasonably have foreseen at the date of closing of tender of this Contract to secure goods, materials, and/or services as are essential to the proper carrying out of the Works” may be considered as a ground to entitle the contractor to apply for an extension of time.

In this regard, this may potentially be the best recourse for the contractor to claim for an extension of time under the PWD Contract as it embodies the generic definition of a force majeure. It surely cannot be the case that it was reasonably foreseeable for the contractors to envisage the implementation of the MCO at the date of tender save for tender documents drawn up post-COVID-19, i.e January 2020 when the COVID-19 was a live issue (foreseeability is a question of fact and degree and ultimately it is arguable).

Reference should also be given to the following clauses to demonstrate the requirements of the contractor to comply with the following clauses:

1. Clause 21.1 of the PWD Contract – “contractor shall comply in all aspects with any law, regulation or by-law, or any other directive issued by any public authority”
2. Clause 77.1 of the PWD Contract – “In the event of any outbreak of illness of an epidemic nature, the Contractor shall comply with and carry out such regulations, orders, and requirements as may be made by the Government or the local medical or health authorities for the purpose of dealing with and overcoming the same”

(“hereinafter referred to “Contractor’s mandatory obligations”)

By reason of the MCO and the Contractor’s mandatory obligations, the contractor is surely placed in a situation preventing him to fulfil his bargain of the construction contract. Hence, while at first blush the COVID-19 outbreak and the MCO may not fall within the definition of a force majeure under the PWD Contract, clause 43.1(i) of the PWD Contract may be the saving grace that the contractors are in desperate need of for an extension of time.

Alternatively, the following clauses may be relied on by the Contractor for an extension of time in light of the MCO and COVID-19 outbreak:

1. Clause 43.1(c) of the PWD Contract which involves the suspension of works by the Superintending Officer under Clause 50 of the PWD Contract; and

 

2. Clause 43.1(e) of the PWD Contract which involves the Superintending Officer’s instructions under Clause 5 of the PWD Contract.

 

1. In view of the contractor’s possible EOT entitlement under Clause 43.1 (i) of the PWD Contract, can the contractor claim for loss and expense?

The answer is No. This is because Clause 44.1 of the PWD Contract on claims for loss and expense does not cover the list of delays govern under Clause 43.1 (i) of the PWD Contract as explained above.

2. In light of the MCO and/or the COVID-19 outbreak, are there any other relevant events in relation to the contractor’s claim for EOT which may necessarily enable the contractor to claim for loss and expense?

The answer is Yes and they are as follows:

1. If there is written instruction by the Architect to suspend all works for a continuous period in light of COVID-19 and the MCO, the contractor may potentially be entitled for a claim for loss and expense (Clause 43.1 (c), Clause 44.1 and Clause 50 of the PWD Contract)

 

2. If there are any written instructions by the Architect to stop all works for a continuous period in light of COVID-19 and the MCO, the contractor may potentially be entitled for a claim for loss and expense (Clause 43.1 (e), Clause 44.1 and Clause 5 of the PWD Contract)

 

3. If there is a delay Employer’s craftsmen or tradesmen which is a very real possibility owing to the economic downturn and disruption in the supply chain owing the COVID-19 outbreak, this may very well hinder the contractor’s work progress. This falls under an Employer’s event entitling an extension of time thus further enabling the contractor to claim for loss and expense. (Clause 43.1 (h) and 44.1 of the PWD Contract)

WHAT HAPPENS IF YOUR CONTRACT DOES NOT CONTAIN A FORCE MAJEURE CLAUSE?

In the event a contract is silent on the existence of a force majeure clause, the remedy of parties may then lie under Section 57 of the Contracts Act 1950, i.e the Doctrine on Frustration of Contract. However, the concept of frustration under Section 57 of the CA 1950 does not deal with the concept of a relevant or delaying event for the purposes of entitling a party to an extension of time but for a party to discharge its contractual obligations, rendering the contract void.

For the concept of frustration to apply, there must be an event that happened in the course of the performance of the contract which is beyond the control of the parties rendering the performance of the contract either significantly different from what the parties have bargained for or which renders the contract impossible to perform. With the possibility of the MCO being extended until the 28.04.2020 and with the chance of resumption of work, it remains to be seen whether frustration can be raised for an event which is temporary in nature.

However, if the MCO is prolonged further which is a real possibility, one may be successfully argued that the uncertainty as to when MCO would end may possibly be used as a frustrating event, discharging the contractual obligations of the parties as the party’s contractual obligations have become radically different from what was envisaged at the inception of the contract.

STEPS TAKEN BY AUSTRALIA AND THE UK

The Australian and the UK government have declared the engineering and construction industry as essential services to ensure continuous progress and this is possible through strict enforcement of social distancing, shift working and surveillance of the workforce.

 On 2.04.2018, the Australian government issued a Ministerial Order entitled “Environmental Planning and Assessment (COVID-19 Development – Construction Work Days) Order 2020” to allow any construction works to operate on weekends and public holidays subject to compliance with social distancing rules.

The UK Government is currently maintaining that construction sites can continue to operate despite the lockdown, provided the requisite measures are in place (i.e. separation of workers by two-metres to minimise the risk of spreading the virus, adherence to the Public Health England (PHE) guidelines and new COVID-19 Construction Site Operating Procedures (SOP).

MOVING FORWARD – PROACTIVE STEPS THAT SHOULD BE TAKEN

The players in the construction industry are advised to take the following actions:

1. Examine the relevant construction contracts to identify the force majeure clause;
2. Examine if there are any limitations or timelines to invoke the force majeure clause;
3. Examine if there are any other clauses which can be relied upon in light of the MCO and/or COVID-19;
4. Examine if there are any clauses to cater for any change of laws and/or regulations which may give rise for an extension of time and/or loss and expense;
5. Construction companies should set plans in place to resume construction operations once the MCO is lifted;
6. Explore alternative means of performing, reducing delay, or minimising any loss to the other party. This may require considering alternative suppliers, or alternative methods of delivery, even if at a higher cost
7. Parties should be prudent to collate and maintain all supporting documents and/or contemporaneous documents for the purposes for any claim for extension of time and loss expense;
8. Parties seeking relief for extension of time and loss and expense should endeavour to comply with the prescribed notice requirements or process under the provisions of the contract. Failure to comply with the same may be fatal; and
9. The Parties should also demonstrate that the implementation of the MCO affects the critical path of the baseline work programme to demonstrate the entitlement of extension of time.

 

CONCLUSION

The announcement of MITI to allow specific construction sectors to operate subject to approval and health & safety protocols may just be the light at the end of the tunnel for the construction industry. Perhaps, some guidance can be gleaned from Australia and the UK to keep the construction industry moving amid this global atrocity.

It is without a shadow of a doubt that the construction industry is going to take a big hit as this pandemic has the capability of significantly disrupting the operations and execution of building and infrastructure projects in Malaysia. Therefore, it is prudent for the players in the construction industry to wake up and formulate an effective project management system to withstand and to keep their respective construction firms afloat in the wake of an economic downturn looming upon us.