Introduction
The Temporary Measures for Reducing the Impact of Coronavirus Disease (COVID-19) Act 2020 (“COVID-19 Act”) came into force in Malaysia on 23 October 2020. Some have commented: too little, too late.
The long title of the Act states its purpose is to reduce the impact of COVID-19. Yet, the first nationwide COVID-19 measure—a full lockdown—was implemented on 18 March 2020, over seven months earlier, crippling commerce and many businesses. By the time the Act came into force, much of the economic impact had already been felt, and in some cases, irreversibly.
This article highlights three broad reasons why the COVID-19 Act may fall short of its intended purpose.
1. Potentially Re-writes Contracts
The COVID-19 Act attempts to do too much, particularly under Section 7. It states that where a party is unable to perform contractual obligations due to measures under the Prevention and Control of Infectious Diseases Act 1988 (PCID Act), the other party cannot exercise its contractual rights.
Most modern commercial contracts already anticipate non-compliance and regulate the consequences. For instance:
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In standard building contracts, if the employer causes delays (e.g., inability to supply materials due to COVID-19 measures), the contractor is usually entitled to an extension of time. Section 7, however, prevents the contractor from exercising that right until 31 December 2020. Some contracts require applications for extensions to be made within a specified timeframe as a condition precedent. Failing to do so may waive the right permanently, creating unintended consequences.
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What if a performance bond expires during the COVID-19 Act’s operation? Ordinarily, a refusal to extend the bond allows the other party to call on it, a right that Section 7 could suspend if the contractor is “unable” to extend the bond.
Other contractual mechanisms may similarly be affected, including termination rights, default claims, or enforcement of securities.
A more targeted approach may have been preferable, such as temporarily:
- Preventing a default from being triggered;
- Preventing termination or default claims;
- Suspending enforcement or execution proceedings;
- Preventing enforcement of securities or appointment of receivers;
- Suspending legal proceedings on guarantees;
- Suspending repossession of chattels; or
- Suspending rights to re-enter or forfeit premises under leases or licenses.
Singapore’s equivalent legislation provides a useful reference.
2. Who Qualifies for Protection?
A key limitation of the COVID-19 Act is the trigger point under Section 7, which applies only where non-performance is due to measures under the PCID Act.
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If a contractor’s inability to perform is caused by a foreign lockdown (e.g., a factory in China), Section 7 does not apply, as these are not PCID Act measures.
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The Act is vague on causation. Must COVID-19 measures be the sole cause, a material cause, or merely a partial cause?
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Determining causation is challenging. Courts can provide a post-mortem, but contracting parties need certainty upfront to know whether rights or remedies are suspended. Singapore addresses this by appointing assessors to make early evaluations.
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There is also no deterrence: breaches are not statutory offences, unlike comparable legislation abroad.
3. What Happens When Protection Ends?
Section 7’s protections expire on 31 December 2020. One interpretation is that contractual rights are merely temporarily suspended, with breaches enforceable from 1 January 2021.
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A contractor significantly behind schedule cannot be immediately determined, but risks enforcement when the Act expires.
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This uncertainty may discourage continued performance.
Similar issues arise under Section 36, which extends the defects liability period in sale and purchase agreements. For example:
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If the defects liability period ends on 30 September 2020, the Act adds 166 days.
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But who will rectify the defects? The main contractor’s liability under the original contract may have expired, creating a mismatch.
Additionally, the COVID-19 Act does not override separate state legislation, such as in Sabah and Sarawak, limiting its uniformity.
In these situations, mediation under Section 9 may provide the most practical resolution.
Conclusion
The COVID-19 Act’s vague language creates both opportunities and challenges. While it provides a legal basis to argue against contract enforcement, the uncertainty and gaps may ultimately undermine these arguments.
It is now up to the courts to interpret the Act in a manner that promotes its purpose—mitigating the impact of COVID-19—while remaining mindful of commercial realities in these unprecedented times.
This article is authored by:
Foo Joon Liang FCIArb, FSIArb, FHKIArb
Partner, Gan Partnership
E: joonliang@ganlaw.my
DISCLAIMER: This article is for general information only and should not be relied upon as legal advice. The position stated is as at 16 November 2020.
