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Unable To Perform Contract Obligations?

The outbreak of Coronavirus has significantly impacted the nation, especially since the Prime Minister of Malaysia, Tan Sri Muhyiddin Yassin, declared that entire Malaysia would be on a movement control order starting from March 18 to 31. Hence this had raised concern to many businesses, especially when they are not able to perform their obligations under a contract.

We have provided a step-by-step guide as to what a contractual party may do when they are not able to perform its contractual obligation, especially during the outbreak of Covid-19.

Step 1

Force Majeure clause

A properly drafted contract should contain a Force Majeure clause that is included in contracts to remove liability for natural and unavoidable catastrophes such as floods, fires, earthquakes, wars, invasions, terrorist attacks, and government orders or law such as Movement Control Order. Hence if your obligations are affected by the Movement Control Order i.e. holding of any events etc., then parties obligations are relieved or suspend from the contract.

If the performance is not affected by the Movement Control Order but the outbreak of the Covid-19, then it is necessary to see if the Force Majeure clause cover situations such as “epidemics” or “pandemics”. Not all obligations are automatically relieved or may be terminated during the outbreak. It is necessary to see how such obligations would render a party's inability to perform during the outbreak.

Be sure to also check what are the requirements provided in the Force Majeure clause for a party to suspend or terminate the contractual obligations. 

Step 2

Frustration

If the contract does not include any Force Majeure, then a party may inform the other party of the contract to frustrate the entire contract as a whole.

Frustration of contract is the legal termination of a contract because of unforeseen events that make the contract and its objectives impossible to execute i.e., during the outbreak of Covid-19 or Movement Control Order.

A party cannot merely raise frustration simply because it is expensive to perform as frustration is not a tool to run away from a bad bargain. It has to be impossible to perform.

Step 3

Renegotiate

A party may renegotiate a contract if:-

  • performance of the contract is temporary impossible due to the force majeure event during the contract period

  • performance of the contract is partially impossible

During the renegotiation of a contract, a party may consider to include terms such as:-

  • an extension of time to perform its obligations

  • cancellation policy

  • performance subject to certain pre-requisite or conditions

  • elements to suspend or terminate the contract by considering the Covid-19 outbreak situations