Force majeure: Can businesses protect themselves in a pandemic?
By Chee Jo-Ey |   |  Featured, Income+, Mainstream

By Chee Jo-Ey
THE coronavirus outbreak has been declared a pandemic and for businesses, it has caused various levels of disruption.

Not only do they have to find ways to stay afloat, some are also facing challenges in adhering to their contractual obligations.

In this time of uncertainty, many local and multinational businesses are facing growing concerns with the performance of their contracts affected in varying degrees by the coronavirus outbreak. In particular, certain contracts are now commercially impossible to perform.

It was recently reported that Wimbledon’s organisers are set for a US$141 mil payout after insuring themselves against a pandemic. The tennis tournament was set to run from June 29 to July 12 this year, but was cancelled because of the coronavirus pandemic. It was noted that most sports businesses are unlikely to have taken out such a policy, but could be covered by a force majeure clause which could cover unexpected circumstances.

But what about local businesses? What can they do to protect themselves in case of a pandemic?

Wong & Partners disputes resolution partner Datuk Mohd Arief Emran Arifin said businesses should incorporate force majeure clauses into their standard term contracts.

However, they must ensure that: the situations they would like to be covered are clearly provided in the force majeure clause and the effect of the force majeure event -- that is whether to allow for an extension of time, suspension of the contract, termination of the contract and any related remedies that arise from such an event.

Force majeure clauses are contractual clauses that alter parties' obligations and/or liabilities under a contract when an extraordinary event or circumstance beyond their control prevents one or all of them from fulfilling those obligations.

Force majeure is not a right under common law or under our Contracts Act. This is a concept that was originally derived by common law lawyers from French law. It covers situations such as a pandemic, diseases, war, flood, government action or act of God,” says Emran.

The clause is standard in most contracts if they are drafted by a diligent lawyer, he noted. However, the devil is in the details. The scope of the force majeure must be considered. It depends on whether the clause is specific or drafted well enough to cover circumstances that companies and businesses face today. A force majeure clause that is not well drafted may not cover instances that we face today.

According to Emran, there are other avenues available to businesses and companies. Other than force majeure, they could consider frustration which is provided for under the Contracts Act.

If they could show that the events arising today, the Covid-19 pandemic and the MCO, have rendered the contract to be frustrated, that is not being of the same character to that of what was originally planned, then you may provide a notice to terminate the contract.

However, this may not be applicable to all contracts. It will depend on the facts of each case. Also note that just because it has become difficult or more expensive to comply with the obligations, it does not automatically mean that frustration applies.

“Other than that, it is also advisable that parties reach out to their counterparts. Discuss other avenues to resolve the issues. We are in this together. The spirit of the contract and the business relationship should be continued in the current climate.

“Also consider your right to an extension of time. If there are clauses in the contract that allow for a right to seek an extension of time, please make the necessary application. The other side may not be allowed to reject without valid reasons. There may be a duty to act in good faith. We have to look at all the terms of the contract and the facts,” adds Emran.

However, SME Association Malaysia national president Datuk Michael Kang says: “The government has to declare a force majeure otherwise it won’t apply. A lot of small and medium enterprises (SMEs) are breaching contracts due to the MCO and even though it’s not their fault, they still have to pay a penalty.

“It doesn’t matter that most contracts have the force majeure clause if the government fails to announce it. My association has proposed to the government to declare force majeure but we’re rejected by the government with no reason given.

“So many SMEs are liable to suits when they can’t fulfil their contracts. Most SMEs don’t have insurance that will protect them from the pandemic and the general insurance will not help SMEs now.”

According to MSIG insurance agent Chan Soo Hong, there is no policy for a pandemic situation like right now to protect businesses. The common ones are those we are familiar with that cover fire, liability, indemnity and so forth and local companies he dealt with usually don’t buy special policies other than those.

“No one is predictive enough to buy special policies that cover such a pandemic that is an unexpected circumstance that only comes along once in many years. I also foresee that it would be difficult to prove the relationship between the drop in business and such unexpected events. But it’s a closed door even if you want to purchase one now,” says Chan. -- April 13, 2020

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