Remedies for Construction Contracts During Covid-19 Outbreak
Updated: Apr 9, 2020
With the Coronavirus (COVID-19) outbreak in our country, followed by implementation of Movement Control Order 2020 (MCO) by the Malaysia government from 18 March 2020 to 14 April 2020, all private and government businesses, except for essential services, are ordered to be closed throughout the MCO period. This event has significantly impacted significant sectors in the nation.
In such circumstances of freeze in the operation of private and government sectors, including the movement control of people in the country, the delays or failures to fulfill the contractual obligations amongst companies are increasingly apparent. The impact has not left out the construction sector when a contractor is prohibited from carrying out any construction work throughout the MCO period. As such, in this situation, are the contracting parties protected from liabilities of non-performance or delay in carrying out their contractual obligations under their construction contract?
This article narrows its consideration to how the outbreak of COVID-19 and implementation of MCO may interact with the existing law concerning Force Majeure events of construction contracts under the Malaysian standard forms of a contract of
Pertubuhan Akitek Malaysia (PAM);
Public Works Department (PWD); and
Construction Industry Development Board (CIDB).
Remedy available under PAM
A party under PAM has no resort to terminate the contract or suspend the work during a situation such as the Covid-19 outbreak or any other events which may be treated as a Force Majeure event in a commercial contract. However, a Force Majeure clause can be invoked for extension of time under clause 23.1 and 23.8.
As such, under PAM the Force Majeure event is to be interpreted narrowly, the “circumstances beyond the parties control” alone is not sufficient to constitute a Force Majeure event. The circumstances beyond the parties control must also be caused by terrorist acts, governmental or regulatory action, epidemics and natural disasters as stated under Article 7 (ad). Where Article 7 (ad) expressly provides that:-
“Force Majeure means any circumstances beyond the control of the Contractor caused by terrorist acts, governmental or regulatory action, epidemics and natural disasters.”
The outbreak of COVID-19 is justified as a Force Majeure event under Article 7 (ad) of PAM as the outbreak of COVID-19 has been announced by the World Health Organization (WHO) as an epidemic. The confinement period during Movement Control Order 2020 also falls within the definition of Force Majeure in PAM as it is a governmental or regulatory action that directly affected the Contractor to carry out their contractual obligation. As a consequence, the Contractor shall be entitled to apply for an extension of time.
Remedy available under PWD
While under PWD, the outbreak of COVID-19 is not a Force Majeure event. As the epidemic and government’s regulation do not fall under the definition of Force Majeure under Clause 58 that entitled the Contractor to terminate the contract or automatically entitled for extension of time under Clause 43.1(a). Further, Clause 77.1 PWD expressly provides that:-
“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.”
It must be noted that the outbreak of COVID-19 is not a ground that automatically entitled the Contractor for extension of time or to terminate the contract. The Contractor is placed in a passive role under PWD and should comply with the government’s regulation and order in this situation.
However, the Contractor may still be able to apply for an extension of time under Clause 43.1(i) PWD in the situation beyond control and unforeseeable event by the Contractor.
Clause 43.1(i) PWD provides as follow:-
“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 such goods, materials and/or services as are essential to the proper carrying out of the Works.”
The outbreak of COVID-19 and MCO can be used as a ground to seek for extension of time under Clause 43.1(i) as it is beyond the Contractor’s control and not reasonably have foreseen in which has caused the Contractor to secure the required goods, materials and/or services.
Remedy available under CIDB
Unlike PAM and PWD, CIDB has no specific clause to govern the situation of an outbreak of an epidemic or government’s regulations and order. However, the Contractor may rely on the Force Majeure clause. Generally, Force Majeure clause to protect the parties from liabilities in the event of a party is prevented from performing its contractual obligations by circumstances that are unforeseeable and beyond their control, such as the outbreak of COVID-19 and MCO.
Clause 24.1(a) of CIDB allows extension of time by the Superintending Officer in the event of Force Majeure provided the Contractor has worked with due diligence and has taken all reasonable steps to avoid or reduce such delay.
As the outbreak of COVID-19 and MCO falls under the Force Majeure event that prohibited the Contractor from carrying out any construction work and would have caused an unavoidable delay of the Contractor’s work, the Contractor may entitle to apply for an extension of time under Clause 24.1.
AS A CONTRACTOR WHAT YOU SHOULD TAKE NOTE?
As discussed above, the outbreak of COVID-19 and MCO allows the contractor to apply for an extension of time. However, the remedy provided in the contract is not automatically applied to the contractor. A contractor or party affected should satisfy and comply with the procedural requirement provided in the contract. The contractor shall take note and comply with the procedural requirement accordingly to prevent their rights for the remedial action to be deprived. The procedural requirement under each Malaysian standard forms of contract are as follows:-
Extension of time under PAM
Clause 23.1(a) provides that the contractor shall give written notice to the Architect his intention to claim for extension of time with an estimated of extension require supported with all particulars of the cause of the delay of time within 28 days from the date of commencement of the MCO (or outbreak of COVID-19 which has caused the delay to the work). Clause 23.1(a) also stipulates that the written notice is a condition precedent to an entitlement of extension of time.
The contractor should also within 28 days of the end of the MCO, (or outbreak of COVID-19 which has caused the delay to the work) sends his final claim for extension of time supported with all particulars to the Architect.
Extension of time under PWD
Clause 43.1 provides that the contractor shall give written notice to the Superintending Officer as to the cause of delay and relevant information with supporting documents upon becoming reasonably apparent that the progress of work is delayed.
Extension of time under CIDB
Clause 24.2 provides that the contractor shall give notice of delay within 30 days of the commencement of the MCO (or outbreak of COVID-19 which has caused the delay to the work) to the Superintending Officer together with the contract, estimated length of delay, an extension of time required and details of the effect of the event of a delay on the work program.
It is vital that the above-mentioned procedures are strictly complied with. In the case of Bhaskaran a/l Thiruppuvanam v Ong Chong Realty Sdn Bhd & Anor  MLJU 644, the Court dismissed the D2’s counterclaim under Clause 24 PAM 2006 (Loss And/Or Expense Caused by Matters Affecting The Regular Progress Of The Works) on the ground that the condition precedent on notice in clause 24.1(a) and (b) had not been complied with and D2 is not entitled to these claims.
In this case, the Court referred to The PAM 2006 Standard Form of Building Contract and quoted as follows:-
“ii.“As a concluding comment, it is submitted that being prescribed as a mandatory requirement expressly, Clause 23.1 (a) mandates strict compliance on the part of the contractor. It, prima facie, circumvents event he ‘prevention principle’ mentioned earlier. Hence, the contractor should be wary of its serious ramifications, lest non-compliance on his part results in the architect refusing to proceed any further in terms of the assessment of the claim in question. Here, the contractor must be mindful of the difference between the PAM Contract 2006 and similar provisions in other contemporary forms of conditions of contract being used in the country.” (page 431); and
iii.“The provision goes on to state ‘The giving of such written notice shall be a condition precedent to any entitlement to loss and/or expense that the Contractor may have under the Contract and/or Common Law’. As the wording used is similar to that employed under Clause 11.7(a), similar considerations apply. Be that as it may, the giving of the written notice by the contractor at the right time is mandatory (see the use of the term ‘condition precedent’). Failure to comply with the requirement will be fatal not only to his claim for reimbursement under the contract… In reviewing a similar provision in the JCT 98 Form, D Chappell in Parris’s Standard Form of Building Contract (3rd Edn) has this to say at page 286:
Failure to notify the architect in advance will deprive him of the opportunity to take any remedial action open to him…“. (page 510-511).”
From the above, the contractor needs to comply with the procedures set out under different types of contracts to access the remedy provided under the contract they have entered.
In conclusion, the outbreak of COVID-19 and MCO is unprecedented in Malaysia. One must be noted that there will be no “one-size-fits-all” contract when dealing with this situation. The specific clauses in the different contracts shall be taken into consideration accordingly. A wise contracting party shall be fully alert of the terms when entering into a contract and understand the steps to be taken stipulated under such a contract to protect his rights and to avoid undesired disputes in the future.