Contractual obligations under the COVID-19 Bill
On 25 August 2020, Dewan Rakyat passed the Temporary Measures for Reducing the Impact of Coronavirus Diseases 2019 (COVID-19) Bill (“the Bill”). The Bill provides for temporary measures to lessen the impact of the COVID-19 pandemic. Such measures are meant to address the effects of the pandemic on the country’s economy and well-being.
In this article, we focus on Part II of the Bill which deals with contractual obligations and claims. When the Bill is passed, Part II will be deemed operational from 18 March 2020 to 31 December 2020 (“operational period”). If the Minister of Law deems it necessary, then the operational period may be extended.
Clause 7 specifies that if a party is unable to perform their contractual obligations due to any of the measures undertaken pursuant to the Prevention and Control of Infectious Disease Act 1988 to curb the spread of COVID-19, the innocent party will not be entitled to exercise their rights under the contract. The categories of contract, which Part II of the Bill applies to, are:
- construction or supply of construction material, equipment or workers;
- performance bond granted pursuant to a construction contract;
- professional services contract;
- lease or tenancy of non-residential property;
- event contracts;
- contract by a tourism enterprise; and
- religious pilgrimage-related contract
An important takeaway from clause 7 is that the inability to perform the contractual obligation must be related directly to the measures to stop the spread of COVID-19. This means that if the default occurred before the COVID-19 measures were undertaken or are unrelated to such measures, the defaulting party will not be able to avail themselves of the relief under Part II of the Bill.
Further, an issue we foresee with clause 7 is the innocent’s party ability to prove that the breach of contractual obligations is not connected with the measures undertaken to stop the spread of COVID-19. The Bill is silent on the defaulting party’s obligation to provide any details or fulfill any requirements first, before seeking to obtain the relief pursuant to clause 7 of the Bill.
Taking a page from our closest neighbour, Singapore’s COVID-19 (Temporary Measures) Act 2020 (“Singapore COVID-19 Act”) provides for a similar provision but with a more detailed mechanism. For example, a party whose contract falls within the ambit of the Singapore COVID-19 Act and who wants to be accorded protection from contractual claims, must serve a notification for relief to the other party(s) of the contract, its guarantor or sureties and any other person as may be prescribed. The other party may then appoint an assessor to determine whether the case qualifies for the reliefs accorded in the Act.
Clause 9 of the Bill provides for the option of settling any dispute under clause 7 through mediation. In light of the use of the word “may” under clause 9, the mediation option is a voluntary one. In the event the mediation process is successful, clause 9(3) states that parties must then enter into a written settlement agreement, duly signed by both parties and will thereafter be authenticated by the mediator. The Bill further states that the duly authenticated settlement agreement shall be binding on both parties.
The procedure for mediation laid out in clause 9 is identical to the procedure laid out in the Malaysian Mediation Act 2012. Thus, this begs the questions of the purpose of clause 9(3) to (5), as reference could simply be made to the Mediation Act 2012. Clause 9(2) states that the procedure for mediation will be decided by the Minister of Law. If for whatever reason the announcement of the procedure for mediation is delayed, this can then cause parties to flood the courts with the filing of new suits, as without the mediation option, the court is the only avenue for parties to resolve their disputes arising from this Bill.
As stated above, Part II of this Bill is deemed to come into force on 18 March 2020 and will operate until 31 December 2020. However, the savings provision under clause 10 provides that any contract terminated, performance bond forfeited, damages received, legal action, arbitration or mediation commenced from 18 March 2020 until the date of publication of the new Act, is deemed valid. This means that up until the date of publication of the new Act, parties would still be allowed to exercise their rights under the contract even if the performance of such contract was affected by the measures taken since 18 March 2020 to combat the spread of COVID-19.
The savings provision may therefore dilute the main purpose of the Bill which is to give an opportunity to adversely affected parties to recover from the effects of the pandemic. In comparison, the Singapore COVID-19 Act does not have such a savings clause. Once the notification for relief has been successfully served, unless proven otherwise, all actions in court, arbitral proceedings and enforcement of any security is not allowed until the expiry of the prescribed period. Therefore, the Singapore COVID-19 Act seems to provide better protection for the defaulting parties under the contract, whereas our Bill is aimed at providing more protection to the innocent (non-defaulting) parties under the contract.
It can be said that clause 10 has the effect of leaving Part II of the Bill as a toothless tiger. Our advice to corporations or individuals with a genuine claim for breach of contract, is to seek to enforce their claim (via court or arbitration) as soon as possible to avail themselves of the leeway provided pursuant to the savings provision.
The Bill was passed in Dewan Negara on 22 September 2020. No announcement has yet been made on the date the Bill will come into force, though we expect that this will take place within the last quarter of this year.
If you have any questions or require any additional information, you may contact Saritha Devi Kirupalani or the ZICO Law partner you usually deal with.
This alert is for general information only and is not a substitute for legal advice.