COVID-19: Construction Projects – What You Need to Know and What You Can Do Now

The Malaysian Government has, in its effort to contain the COVID-19 outbreak, implemented a Movement Control Order (“MCO”) throughout Malaysia from 18 to 31 March 2020, which is now extended to 14 April 2020 (“Relevant Period”). The MCO has affected the performance of non-essential works – including works at project/ construction sites where they are required to stop work during the Relevant Period. Whether COVID-19 outbreak or the consequential MCO constitutes a force majeure event is a matter of interpretation of the provisions of contract. Similarly, how the outbreak or the MCO affects the rights and obligations of the parties in terms of timing and costs is much dependant on the provisions of the contract.   
 
In this Article, we will focus on the following standard forms of construction contracts commonly adopted in Malaysia:
 
  1. Malaysian Public Works Department’s standard form of contract with quantities (P.W.D. Form 203A (Rev. 2007) (“PWD Form”);
  2. Malaysian Institute of Architects’ standard agreement and conditions of PAM Contract 2018 (“PAM Form”);
  3. FIDIC’s conditions of contract for construction (2nd Edition, 2017) (“FIDIC Red Book”); and
  4. Asian International Arbitration Centre (Malaysia)’s standard form of building contract (2019 Edition) (“AIAC Form”).
Force majeure is a creature of contract
 
Subject to the wordings of the relevant clause, force majeure is commonly referred to in most of the standard form of construction contracts as the occurrence of an event beyond the control of the parties which prevents one or all of them from fulfilling their contractual obligations. There is no general rule as to what constitutes force majeure but whether such a force majeure situation arises, and, where it does arise, the rights and obligations that follow, would all depend on what the parties have agreed in their contract[1].
 
In other words, a force majeure clause is a creature of contract. It will not ordinarily be implied into contracts governed by Malaysian law. Nonetheless, section 57(2) of the Contracts Act 1950 recognises the doctrine of frustration rendering a contract void if performance of the contractual obligations becomes impossible or by reason of some event, performance is impossible or unlawful. The test is whether the supervening event resulted in changed circumstances which in turn renders a fundamental or radical change in the obligation originally undertaken to make the performance of the contract impossible[2] or unlawful. 
 
Force majeure clause in the standard form of construction contracts
 
The PWD Form has a force majeure clause that sets out a list of events which trigger the application of the clause. It appears that the COVID-19 outbreak and the MCO do not fall within the list of events expressly provided under clause 57.2 and the said clause appears to be an exhaustive list.
 
Notwithstanding this, the Malaysian Ministry of Finance in its series of frequently asked questions (“FAQs”) has expressed that the COVID-19 outbreak falls within the force majeure clause under the PWD Form and further provided that for those contracts without a force majeure clause, the Malaysian government would still be able to use the principle and procedure of force majeure to deal with the issue of delay to the programme/ project.[3] For the contracts with a force majeure clause, the Government of Malaysia may be interpreting the same to be a non-exhaustive list of events and therefore, either party is able to rely on it. 
 
At present, there are no reported decisions in Malaysia that determines whether the force majeure events listed in the PWD Form are exhaustive or not. Some commentators have indicated that interpretation of force majeure under the PWD Form is likely to be restrictive because similar matters, which would typically constitute force majeure, are already expressly dealt with as an “Event of Force Majeure”. 
 
The PAM Form defines force majeure as “any circumstances beyond the control of the Contractor caused by, [among others,] epidemics[4].  The COVID-19 outbreak which has been declared a global pandemic is likely to be regarded under such contract as a force majeure situation. 
 
The AIAC Form and the FIDIC Red Book have very similar definition for force majeure. Essentially, force majeure event[5] or ‘exceptional event[6] (the term used in the FIDIC Red Book) is defined as the event / circumstance which:
 
  1. is beyond party’s control;
  2. the party could not reasonably have provided against before entering into the contract;
  3. having arisen, such party could not reasonably have avoided or overcome; and
  4. is not substantially attributable to the other party.
The relevant clauses in both standard forms then provide a non-exhaustive list of events with the qualification that the relevant force majeure/ exceptional event has to satisfy the above circumstances.
 
In any event, the burden to prove that COVID-19 outbreak or the MCO falls within the definition of ‘exceptional events’ or force majeure lies on the party seeking to rely on such clause[7].
 
How does the COVID-19 pandemic or MCO impact the contractual provisions?
 
In most standard form of construction contracts, the occurrence of a force majeure event allows the affected party to apply for extension of time (“EOT”) to complete the works.
 
To apply for EOT, there are usually written notice requirements, requiring the affected party intending to rely on the force majeure event as a ground for EOT to give written notice to the other party within the stipulated time period. This is usually within a certain number of days after the occurrence of the force majeure event. There may be recurring written notice requirements. The failure to give prior written notice of the force majeure event may affect the affected party’s EOT application.
 
The Malaysian Ministry of Works has clarified in its updated list of FAQs[8] dated 1 April 2020 that, subject to obtaining the necessary recommendation[9] and authorities’ approval, ‘critical works’ may be carried out during the Relevant Period. ‘Critical works’[10] are essentially works which, if left unfinished, will cause harm. Nonetheless, if performance of ‘critical works’ during the Relevant Period is recommended and approved, but yet completion of such critical works was late, whether EOT will be granted by reason of disruptions and delay attributable to the pandemic or the MCO remains a question of both fact and law. 
 
The EOT notice requirements 
 
Under the PWD Form, the party who is unable to perform its obligation under the contract because of an event of force majeure, then that party (usually the contractor) is required to inform the other party immediately of the occurrence of the same with full particulars and consequences thereof.[11] The contractor shall also immediately provide a written notice to the superintending officer as to the causes of delay and the relevant information with supporting documents so that the officer can determine the length of delay and grant the appropriate EOT to the contractor.[12]
 
The PAM Form and the AIAC Form have almost similar notice requirements. The contractor shall, within 28 days from the commencement of the event, give written notice to the architect of his intention to claim for EOT together with the initial estimate of EOT and particulars of the cause of delay.[13] The PAM Form also expressly states that such written notice is a condition precedent to the contractor’s entitlement of EOT.[14] Thereafter, within 28 days of the end of the cause of delay, the contractor shall send to the architect the particulars of its EOT claims together with the necessary calculations and documents to substantiate the same.[15] If the contractor fails to submit such particulars to the architect, he shall be deemed to have assessed that the cause of the delay will not delay the completion of the works.[16]
 
Under the FIDIC Red Book, the consequences of an exceptional event have been expressly set out and this includes granting EOT to the affected party[17], provided notice of exceptional event has been given. The affected party shall give notice to the other party of the exceptional events and specify the obligations, the performance of which is or will be prevented.[18] The notice is to be given within 14 days after the affected party became aware or should have become aware of the exceptional event. If the exceptional event has a continuing effect, the affected party shall give further notices describing the effect every 28 days after the first notice[19]. The affected party is also required to give notice when he ceases to be affected by the exceptional event. If the affected party fails to do so, the other party may give notice to the affected party stating that the other party considers that the affected party’s performance is no longer prevented by the exceptional event, with reasons[20].
 
Claim for additional loss and expense incurred due to the force majeure event?
 
Some of the standard forms provide that neither party will be liable for any loss and expense incurred by the affected party. If that has been agreed by the parties, the affected party will have to bear its own loss and expense incurred arising from the COVID-19 pandemic or the MCO. If the contract allows an affected party to claim for loss and expense incurred, the affected party must ensure that he complies with all notification and other procedural requirements stipulated in the contract to ensure that his contractual right to claim such loss and expense is not inadvertently prejudiced.
 
Under the PWD Form and the AIAC Form, the contractor is not entitled to claim for any loss or expense arising from force majeure.[21] This is consistent with the Ministry of Works’ FAQs which states that the Government will not be liable for any losses and expenses due to the implementation of the MCO as the COVID-19 pandemic is beyond the Government’s control. This will be particularly relevant to government projects.[22]
 
The PAM Form provides for the right to claim for costs if the progress of the works is affected by the events listed[23] which list does not include force majeure as defined in the PAM Form. It is silent as to whether the affected party is entitled to claim for costs incurred due to force majeure events.
 
The FIDIC Red Book has significant wordings on the right to claim for costs incurred arising from exceptional events, expressly entitling the affected party to costs only if the exceptional events fall within the five (out of six) exceptional events listed which do not include pandemic or epidemic outbreaks and within the limited circumstances as further prescribed therein[24]. Similar to the PAM Form, the relevant clause is silent as to the party’s financial remedy if the exceptional event is one which falls within the definition of exceptional events but does not fall within any of the listed categories, although such event may still entitle the affected party to an entitlement to extension of time.
 
Contractual termination
 
Under the PWD Form, if either party considers that the force majeure event is so severe or continuing for such a period that it effectively frustrates the original intention of the contract, then the parties can mutually terminate the same.[25]  In such circumstance, neither party will have a claim against, or be liable to, the other save for rights and liabilities accruing prior to the force majeure event.[26] If there is prolonged uncertainty caused by COVID-19, it would be interesting to see whether the Government will exercise its unilateral right under the PWD Form to terminate the contract on grounds of national interest by giving not less than 30 days’ written notice to the contractor[27], or seek a mutual termination of the contract due to force majeure event. The consequences of termination due to national interest is that the payment obligations including all costs and expenditure incurred by the Government and the contractor shall be ascertained according to clause 54 and other consequences of termination will follow clauses 51.1(c)(i), 51.1(c)(ii)(B) and (C).
 
Under the AIAC Form and the PAM Form, the parties do not have a contractual right to mutually terminate the contract on account of force majeure. Nevertheless, the parties can still agree to terminate the contract but the consequences of termination will have to be discussed and agreed between the parties. 
 
The FIDIC Red Book provides that either party may terminate the works if the execution or performance of such works is prevented for a continuous period of 84 days or for multiple periods which total more than 140 days by reason of exceptional event of which notice has been duly given[28]. Parties should exercise this right with considerable caution to avoid being liable for wrongful/ unlawful termination.
 
What you need to do now?
 
Essentially, review the contract clauses. Determine if the COVID-19 outbreak or the MCO falls within the definition of force majeure under the contract. Consider the aspects of the contractual obligations which performance is prevented due to the COVID-19 outbreak or the MCO. Discuss with your counterparty and project consultants the impact of the COVID-19 outbreak or the MCO on the performance of the contractual obligations, especially its impact on time and apply for EOT, if permitted under the contract. Comply with the necessary notice requirements.  Parties should also start on scenario and contingency planning.  
 
Meantime, there is an obligation on the affected party to mitigate its losses and expenses[29]. The burden of proof is on the affected party to show that it has taken reasonable steps to lessen the effect of the force majeure event.
 
If you have any queries, please contact Mr. Shannon Rajan (Partner) at shannonrajan@skrine.com  or Ms. Jocelyn Lim (Partner) at jocelyn.limyeantse@skrine.com.
 
 
Note - Our previous Alert on “COVID-19: Is it a Force Majeure Event or Ground for Frustration of Contract” is available here.
 
 
 

[1] See the Singapore case of Magenta Resources (S) Pte Ltd v. China Resources (S) Pte Ltd. [1996] 3 SLR 62 quoted in the Malaysian case of Muhammad Radhieddeen bin Abdul Khalid v. Saujana Triangle Sdn Bhd [2017] 1 LNS 841.
[2] See Datuk Haji Zainal Abidin Ahmad & Ors v. Sarawak Plantation Agriculture Development Sdn Bhd [2015] 1 LNS 1495
[3] See FAQ No. 1 at page 2 of the FAQs. The full text of the FAQs issued by the Ministry of Finance in the official language of Malaysia is available here.
[4] Article 7(ad) of the articles of agreement of the PAM Form.
[5] Clause 9.34 of the AIAC Form.
[6] Clause 18.1 of the general conditions of the FIDIC Red Book. The FIDIC Red Book no longer uses the terminology of ‘force majeure’ in its 2017 edition.
[7] Intan Payong Sdn Bhd v. Goh Saw Chan Sdn Bhd [2005] 1 MLJ 311.
[8] A copy of the Ministry of Works’ list of FAQs dated 18 March 2020 is available here and a copy of the updated FAQs dated 1 April 2020 is available here.
[9] subject to the recommendation of the enforcement officer / project director (for Government projects) or the resident engineer / principle submitting person (for private projects). See FAQ No. 5.
[10] See FAQ No. 4 for the list of critical works.
[11] Clause 57.3 of the PWD Form.
[12] Clause 43.1 of the PWD Form.
[13] Clause 23.1(a) of the PAM Form and Clause 23(1)(a) and (b) of the AIAC Form.
[14] Clause 23.1(a) of the PAM Form.
[15] Clause 23.1(b) of the PAM Form and Clause 23(1)(c) of the AIAC Form.
[16] Clause 23.1(b) of the PAM Form and 23.1(d)(ii) of the AIAC Form.
[17] Clause 18.4 of the FIDIC Red Book.
[18] Clause 18.2 of the FIDIC Red Book.
[19] Clause 18.3 of the FIDIC Red Book.
[20] Clause 18.3 of the FIDIC Red Book.
[21] Clause 44.1 of the PWD Form and Clause 24.1(a) of the AIAC Form.
[22] See FAQ No. 6. The full text of the FAQs issued by the Ministry of Works is available here.
[23] Clauses 24.1 and 24.2 of the PAM Form.
[24] Clause 18.4(b) of the FIDIC Red Book.
[25] Clause 57.4 of the PWD Form.
[26] Clause 57.5 of the PWD Form.
[27] Clause 52.1 of the PWD Form.
[28] Clause 18.5 of the FIDIC Red Book.
[29] See clause 23.6 of the PAM Form; clause 18.3 of the FIDIC Red Book.