Surviving Another Lockdown: The Extension of COVID-19 Act

Introduction

The COVID-19 pandemic which started back in March 2020 has crippled our country’s economy, leading to disruptions across various industries. Due to the nationwide lockdown in March 2020, many business activities were brought to a complete halt. We’ve seen a cessation in construction works, limited operation in the airlines industry, delays in delivery of goods due to the closure of our borders, and many more. 

Until today, many businesses are still struggling to recover from the impact brought about by the lockdown. Just as these businesses are starting to get back on their feet, the Malaysian government announced another lockdown classified as MCO or CMCO targeting specific states on 11th January 2021 for a period of 2 weeks, subject to extensions as the Malaysian Government deems necessary.  While this second lockdown is unlike the one back in March 2020 because the government has provided a broader list of businesses allowed to operate throughout the second lockdown, it does not change the fact that measures need to be taken to ensure the survival of these businesses.  Some businesses are still operating at a limited capacity, such the hospitality industry as inter-state travel has been prohibited.

On 23 October 2020, the COVID-19 Act (the “Act”) enacted by the government came into force. The purpose of the Act was to reduce the financial impact brought about by the pandemic and the consequential lockdown. While the Act only came into force in October 2020, it has retrospective effect beginning from 18th March 2020, allowing contractual relief for parties who are unable to perform their contractual obligations from 18th March 2020 to 31st December 2020. 

However, this time period has since been extended to 31st March 2021, and again from 12th May to 7th June 2021, via the Minister’s power pursuant to Section 5(2) of the Act. As COVID-19 cases remain alarmingly high, this extension of time is necessary to protect businesses across Malaysia and aid in their recovery. 

Inability to perform contractual obligation

Section 7 of the Act in particular refrains parties from exercising their contractual rights against the party who is unable to perform its contractual obligations due to measures prescribed by the authorities to control or prevent the spread of the COVID-19 under the Prevention and Control of Infectious Diseases Act 1988 (“PCID Act”).

As an example, if a tenant is unable to pay rent during the aforementioned period due to the COVID-19 preventative measures, a landlord will be prevented from evicting their tenants. Another example would be in the case of a delay in delivery of goods due to the closure of borders. Actions cannot be taken against the supplier of goods for the delay pursuant to Section 7 of the Act.

However, it should be noted that the words “due to” in Section 7 of the Act can be construed widely. Though we understand that the inability to perform contractual obligations must be related to the COVID-19 preventative measures, must the measures be a direct cause of that inability? Does the cause of the inability to perform the obligations have to be material? It is also unclear whether the inability to perform can be solely or partially “due to” the preventative measures. 

The open-ended effect and scope of the Act would potentially engender a surge of cases filed in the Malaysian courts to ascertain the degree of inability to perform a contract ‘due to’ the purported preventative measures in place. Until the Courts come up with a set of guidelines or criteria, the open-ended language of the Act would open up the floodgates of litigation for those who are keen on compelling contracting parties to perform their obligations under their respective contracts.

What contracts are covered under these reliefs?

Under the original COVID-19 Act, the aforementioned relief applies to 7 categories of contract which are as follows:-

1. Contracts for construction projects or construction consultancy and any other contract related to the supply of construction material, equipment or workers
2. Pursuant to a construction contract or supply contract, where performance bond or equivalent has been granted
3. Contract for professional services 
4. Lease or tenancy of non-residential property
5. Contracts for events such as any business meeting, incentive travel, conference, wedding, party or other social gathering or sporting event
6. Contract by a tourism enterprise and a contract for promotion of tourism
7. Religious pilgrimage-related contract

Through the recent amendment of the Act that came along together with the extension of contractual relief, two additional types of contracts are now included:-

• Hire-purchase agreements under the Hire-Purchase Act 1967 entered into by smaller businesses, persons falling under the B40 or M40 income classifications for vehicles including motor vehicles, goods or public service vehicles and tourism vehicles.
• Credit sales contract under the Consumer Protection Act 1999, i.e when the purchase of goods is payable by instalments.

The addition of these two contracts were very much welcomed as it has extended the reliefs to assist smaller businesses and the lower to middle income segments of our economy.

What can a non-defaulting party do?

The contractual reliefs pursuant to Section 7 of the Act seem to only be protecting the contracting party who is unable to perform a contractual obligation, also known as the “defaulting parties”. What about the other party who is aggrieved by such inability to perform the contract? Would landlords who suffer losses from tenant’s failure to pay rent, or suppliers who did not receive payment for goods supplied have no avenue of remedying their losses? 

Any disputes arising from the preventative measure implemented by the government may be settled by way of mediation as prescribed under Section 9 of the Act. It is pertinent to note that this is not compulsory in light of the use of word “may”. The Act further provides that the duly authenticated settlement agreement shall be binding on both parties, allowing another avenue for dispute resolution outside of the usual court system. Alternatively, parties would still have the option of bringing an action in Court. The non-compulsory nature of mediation would have the effect of defeating the intended purpose of the Act in reducing disputes which arose as a result of the COVID-19 pandemic. 

In contrast, Singapore has adopted a specific dispute resolution system under their COVID-19 Act which involves assessors determining whether a claim is eligible for contractual relief. This preliminary assessment mechanism provides certainty, saves time and costs for parties involved in a dispute over their contractual obligations. This will in turn reduce the number of cases filed in the Singapore Courts. Perhaps, the Malaysian government may look into adopting a similar approach in order to balance the interests of both contracting parties. 

Saving Provision 

As the Act only came into force on October 2020, many legal actions have been filed prior to this Act. Despite the retrospective effect, the Act states that certain actions such as any legal proceedings commenced and judgments obtained before the Act came into operation would still be valid pursuant to Section 10 of the Act. This means that any of these actions that were commenced from 18th March 2020 up to 23rd October 2020 may not be subject to the reliefs under Section 7 of the Act, and parties would still be allowed to exercise their rights under the contract, even if said performance was due to the COVID-19 preventative measures. 

This has watered down the intended purpose of the Act which provides these reliefs for defaulting parties. The innocent party, or “non-defaulting parties” aggrieved by the breach of contract who wants to enforce their claim for breach of contract may have already taken advantage of this saving provision by commencing court or arbitration proceedings before the Act came into force.

Conclusion

The recent extension of time period for contractual reliefs would now provide more breathing space for businesses to fulfil their contractual obligations in view of the hardships and effect of the COVID-19 pandemic. What used to be deemed as a transient relief for existing contracts will now be made more effective with the extension, and gives small-medium business owners a fighting chance to weather this storm.