Malaysia has imposed a Movement Control Order (“MCO”) effective from 18th March 2020 to 28th April 2020 as a measure to curb the spread of COVID-19.
During the 1st and 2nd phases of MCO
During the 1st and 2nd phases of MCO (from 18th March 2020 to 14th April 2020), MCO applies to building projects, except for “critical works,” which are defined as those that could cause harm or damage to workers, the public, or the environment if they are stopped. Examples of critical works are set out at item 4 of the FAQs as updated by the Minister of Works (“MOW”) on 24th March 2020. However, one can apply for an exemption if a recommendation is obtained from the project superintendent/project director for government projects and from the resident engineer/principal submitting person for private projects. Thereafter, the exemption may be extended if approval is obtained from the persons identified at item 5 of those FAQs (see the FAQs updated by the MOW on 24th March 2020 at https://www.pmo.gov.my/2020/03/soalan-lazim-faqs-berkaitan-perintah-kawalan-pergerakan-kementerian-kerja-raya-malaysia-kkr/).
During the 3rd phase of MCO
As for the 3rd phase of MCO (from 15th April 2020 to 28th April 2020), several construction projects and services related to construction works identified at Annex 1 of the Media Release issued by the Ministry of International Trade and Industry (“MITI”) are allowed to operate, provided that (i) the application submitted is approved by MITI and (ii) the requirements of the Standard Operating Procedure are complied with (see the Media Release issued by MITI on 10th April 2020 at https://www.pmo.gov.my/2020/04/approval-to-operate-additional-sectors-to-bolster-the-economy-post-covid-19/).
Provisions Governing Delays Caused by the MCO
The provisions within a typical construction contract that recognise the time impact of an incident such as the MCO is the extension of time (“EOT”). This governs the contractor’s entitlement to time and ought to be distinguished from clauses that govern the termination of contractual obligations.
Common terms specifying the delaying event caused by the MCO include force majeure, delays caused by an appropriate authority, suspension orders by authority, changes in legislation/law, etc. The contractor would be entitled to claim an EOT if the MCO results in one of the events expressly set out in the EOT provisions. These clauses regulate time entitlement under a contract but do not allow a party to terminate or walk away from the construction contract. Specific provisions are required for that.
In this article, we will examine some contractual provisions that may entitle a contractor to more time for its works, in view of the onset of the COVID-19 pandemic and the MCO. Both these events ought to be viewed as distinct events. Conceivably, the COVID-19 pandemic may have a longer and more widespread effect than the MCO.
Typical Construction Contracts
In the Malaysian construction sector, several standard form contracts underlie the contractual relationship between parties on site. As between the developer and the main contractor, oft-used standard form contracts include the Agreement and Conditions of PAM Contract (2006 edition, still widely used today) [“PAM Contract”], the FIDIC Yellow Book (1999 edition, still widely used today) [“FIDIC”], and the AIAC Standard Form Contract (2019 edition, second edition) [“AIAC SFC”].
1. What is Force Majeure?
Force majeure is French for “superior force.” It does not bear a specific legal definition in Malaysia. Where force majeure is regulated in a construction contract, one has to turn to that contract for its legal definition.
PAM Contract – Clause 23.8(a)
Article 7(ad) defines a force majeure event as “any circumstances beyond the control of the Contractor caused by terrorist acts, governmental or regulatory action, epidemics, and natural disasters.” Governmental or regulatory action would include the 42-day MCO imposed by the Government of Malaysia due to the COVID-19 pandemic. Likewise, the pandemic itself falls within this definition of a force majeure event. Where the MCO affects the contractor’s progress of works, the contractor would be entitled to an EOT under Clause 23.8(a).
FIDIC – Clause 19.1
Clause 19.1 defines force majeure as an exceptional event or circumstance that:
- is beyond a Party’s control,
- the Party could not reasonably have provided against before entering into the Contract,
- having arisen, the Party could not reasonably have avoided or overcome, and
- is not substantially attributable to the other Party.
Force majeure may include, but is not limited to, events such as riots, commotions, disorder, strikes, or lockouts by persons other than the Contractor’s Personnel and employees of the Contractor and Subcontractors. All four conditions must be satisfied for an event to qualify as force majeure. The COVID-19 pandemic and the MCO are beyond the contractor’s control, unforeseeable, and not caused by the Employer. Compliance with all conditions entitles the contractor to an EOT under Clause 19.1.
AIAC SFC – Clause 23.8(b)(i)
Article 9.34 defines a force majeure event as an exceptional event or circumstance which:
- is beyond a Party’s control,
- the Party could not reasonably have provided against before entering into the Contract,
- having arisen, the Party could not reasonably have avoided or overcome, and
- is not substantially attributable to the other Party.
Force majeure in AIAC SFC is similar to FIDIC, and the same discussion applies regarding COVID-19 and the MCO.
2. What is a “lockout”?
Some construction contracts permit an EOT to be granted where there is a “lockout” from the site. For example:
PAM – Clause 23.8(d)
Civil commotion, strike, or lockout affecting any of the trades employed upon the Works or any of the trades engaged in the preparation, manufacture, or transportation of any materials and goods required for the Works.
AIAC SFC – Clause 23.8(b)(ix)
Industrial action by workmen, strikes, lockouts, or embargoes affecting any of the trades employed upon the Works or in the preparation, manufacture, or transportation of materials or goods required for the Works, provided the same are not attributable to any negligence, wilful act, or breach by the Contractor, or any Person for whose actions the Contractor is responsible.
Where there is no definition of “lockout” in a construction contract, one may refer to A Dictionary of Law (2nd Edn) by Curzon: the closing of a place of employment or suspension of work, or the refusal by the employer to continue to employ any number of persons employed by him in consequence of a dispute. Where the MCO results in a site closure (non-critical works and unapproved construction works) or work suspension, the contractor would be entitled to an EOT under these clauses.
3. Suspension Order by an Appropriate Authority
Where a suspension order by an Appropriate Authority is regulated in a construction contract, one must turn to that contract for any conditions imposed under it.
PAM Contract – Clause 23.8(w)
Suspension of the whole or part of the Works by order of an Appropriate Authority, provided the same is not due to any negligence, omission, default, and/or breach of contract by the Contractor and/or Nominated Sub-Contractors. Article 7(b) defines Appropriate Authority as “any statutory authority having jurisdiction over the Works.” Article 7(bf) defines Works as “works described in the Articles of Agreement and referred to in the Contract Documents and includes any changes made to these works in accordance with the Contract.”
MCO is a suspension order issued by the Government of Malaysia to prevent the spread of COVID-19. As it was not issued due to negligence, omission, default, and/or breach of contract by the contractor or nominated sub-contractor, implementation by an agency that is a statutory authority may entitle the contractor to an EOT under Clause 23.8(w) if completion is affected.
AIAC SFC – Clause 23.8(c)(xiv)
Suspension of the whole or part of the Works by order of an Appropriate Authority, provided it is not attributable to any negligence, wilful act, or breach of contract by the Contractor, or any Person for whose actions the Contractor is responsible. Article 9.3 defines Appropriate Authority as “statutory authority having jurisdiction over the Works.” Article 9.67 defines Works as all materials, labour, plant, and other things necessary for the proper execution of the Contract. Article 9.46 defines Persons as natural persons, sole proprietorships, firms (partnerships), or body corporates. This provision is similar to PAM Contract, and the discussion above applies.
4. Delays caused by (Appropriate) Authority
FIDIC – Clause 8.5.8
If the following conditions apply:
- (a) the Contractor has diligently followed the procedures laid down by the relevant legally constituted public authorities in the country,
- (b) these authorities delay or disrupt the Contractor’s work, and
- (c) the delay or disruption was unforeseeable,
then this delay or disruption is considered a cause of delay under sub-paragraph (b) of Sub-Clause 8.4 [Extension of Time for Completion].
All conditions must be satisfied, including that the MCO was unforeseeable and followed diligently. If so, the contractor is entitled to an EOT under Clause 8.4(b).
AIAC SFC – Clause 23.8(b)(viii)
Delay caused by any Appropriate Authority or Service Provider in carrying out, or failing to carry out, work affecting the Contractor’s progress, provided that:
- The Contractor has diligently followed procedures.
- The delay was unforeseeable.
- The delay is not attributable to negligence, wilful act, or breach by the Contractor or any Persons for whom the Contractor is responsible.
5. Change in Legislation or Law
FIDIC – Clause 13.7
Clause 13.7 allows an EOT if the Contractor suffers delays as a result of changes in Laws after the Base Date. Clause 1.1.6.5 defines Laws as national or state legislation, statutes, ordinances, regulations, and by-laws of any legally constituted public authority. Clause 1.1.3.1 defines Base Date as 28 days prior to the latest date for submission of the Tender. MCO is a new legal order and may entitle the contractor to an EOT under Clause 13.7 if the order is issued within this period.
AIAC SFC – Clause 23.8(b)(vii)
Compliance with any unforeseeable changes to laws, regulations, by-laws, or terms of any Appropriate Authority or Service Provider. The same rules regarding unforeseeable conditions and tender submission dates apply as described above.
6. Unforeseeable shortages in the availability of personnel or Goods
FIDIC – Clause 8.4(d)
Unforeseeable shortages in the availability of personnel or Goods caused by epidemic or governmental actions. “Personnel” may include consultants or personnel of public authorities and utility companies. “Goods” include Contractor’s Equipment, Materials, Plant, and Temporary Works. If MCO causes such shortages affecting the contractor’s progress, an EOT may be claimed.
7. Delay by Nominated Sub-Contractors or Nominated Sub-Suppliers
AIAC SFC – Clause 23.8(b)(iv)
Delay by Nominated Sub-Contractors or Nominated Suppliers as per Clause 19.6 of the Standard Form of Building Sub-Contract issued by AIAC. Where delays by these parties occur due to MCO, the main contractor is entitled to an EOT under Clause 23.8(b)(iv), following the Sub-Contract provisions.
What Follows After?
If the contractor believes he is entitled to an EOT, this entitlement is not automatic. Contractors must comply with the EOT application mechanisms, usually a 2-tier process: (i) notification of intention to claim EOT, followed by (ii) a formal application with full particulars to substantiate the claim. Strict adherence is usually required by the contract.
Loss and Expense Claims
Not all delaying events entitle the contractor to a loss and expense (“L&E”) claim. PAM Contract Clause 24 governs L&E entitlement and generally relates to delays attributable to the employer, architect, or consultants. Since MCO is not attributable to these parties, no L&E claim arises under PAM Contract.
FIDIC is more generous: Clause 13.7 (changes in legislation) and Clause 19.4 (force majeure) allow L&E claims if MCO results in a lockout. AIAC SFC Clause 24.1 provides L&E entitlement for delays under Clause 23.8(c)(xiv), provided procedural requirements are met.
The mechanism mirrors the EOT process: notification followed by formal application with complete particulars.
Absent of Provisions Governing Delays Caused by the MCO
Where a construction contract does not have provisions governing MCO-related delays, one may rely on the doctrine of frustration under Section 57 of the Contracts Act 1950:
“57. (1) An agreement to do an act impossible in itself is void. (2) A contract to do an act which, after the contract is made, becomes impossible, or by reason of some event which the promisor could not prevent, unlawful, becomes void when the act becomes impossible or unlawful.”
Courts are generally reluctant to allow frustration claims. The Federal Court in Pacific Forest Industries Sdn Bhd & Anor v Lin Wen-Chih & Anor [2009] 6 MLJ 293 held that frustration is only established when performance becomes radically different from that originally contracted. Temporary MCO delays are likely insufficient for frustration; prolonged effects may give rise to frustration depending on facts.
If a contract is frustrated, it ceases to bind the parties, with statutory reliefs governed by Sections 15 and 16 of the Civil Law Act 1956. Courts may allow recovery of sums paid or cease sums payable, provided expenses incurred are accounted for.
Going Forward
Where construction contracts expressly provide for MCO-related delays, parties must review provisions and comply strictly with contractual mechanisms. If silent, legal principles of frustration under Section 57 and relevant case law apply. Contractors must remain mindful of cost control, as standard contracts require mitigation of delays, even those not caused by the contractor.
Authorship and Disclaimer
This article is authored by:
Foo Joon Liang FCIArb
Partner
Gan Partnership
E: joonliang@ganlaw.my
Kaylee Tan Jin Yee
Associate
Gan Partnership
E: kaylee@ganlaw.my
DISCLAIMER: This article is for general information only and should not be relied upon as legal advice. The position stated herein is as at the date of publication on 12th April 2020. For any enquiries on this article, please contact Foo Joon Liang (joonliang@ganlaw.my).
