On 23 October 2020, the Malaysian Government gazetted the Temporary Measures for Reducing the Impact of Coronavirus Diseases 2019 (Covid-19) Act 2020
1 (“
Covid-19 Act”). The Covid-19 Act was a means to provide temporary measures to ease the impact of Covid-19 on various industries and economic sectors in Malaysia. In particular, section 7 of the Covid-19 Act, provides temporary relief to parties who are unable to perform their obligations under the categories of contracts listed in the Schedule to Part II of the Covid-19 Act (“
Relevant Schedule”).
However, at the time the Covid-19 Act was gazetted, it remained to be seen how the Malaysian Courts would approach cases involving claims for protection granted under section 7 of the Covid-19 Act against actions for non-performance of contractual obligations.
Although there has since been a number of reported cases whereby parties have sought protection under section 7 of the Covid-19 Act against action taken against them in respect of their inability to perform contractual obligations, only one of these cases had been decided by the Court of Appeal.
More recently, the Court of Appeal, when called upon to consider section 7 of the Covid-19 Act in
Panzana Enterprise Sdn Bhd v Turnpike Energy Sdn Bhd [2024] 6 MLJ 312 (CA) (“
Panzana”), held among others that the Covid-19 Act has to be interpreted generously considering the special purpose for which the Covid-19 Act was enacted.
This article considers the case of
Panzana and the Court of Appeal’s approach to section 7 of the Covid-19 Act and the lessons which may be drawn by parties wishing to invoke this section 7.
Facts
The Respondent was responsible for overseeing the construction of the Damansara-Shah Alam Elevated Expressway (DASH) (“
Project”). The Appellant was the main contractor for the Project which the Respondent was overseeing. The obligations of the Appellant as main contractor of the Project were governed by, among others, a letter of acceptance dated 4 August 2016, the Conditions of Contract dated 27 February 2017 (“
COC”) and two other documents, namely the special conditions to the COC (“
SPCOC”) and a supplemental agreement dated 24 September 2020 (collectively “
Documents”).
The Project was expected to be completed on 28 February 2019 and was later extended to 30 December 2020.
The Appellant provided two Bank Guarantees (“
BGs”) issued by Ambank (M) Bhd in favour of the Respondent as performance bonds pursuant to the SPCOC.
On 10 February 2021, the Project’s Superintending Officer (“
SO”) issued a Notice of Default under Clause 51.1(a) of the COC, alleging that the Appellant had failed to conduct the works under the contract regularly and diligently (“
Notice of Default”). The Appellant alleged that the Notice of Default was wrongful. In particular, the Appellant contended that the project consultant should
not have rejected the Appellant’s application for an extension of time. On 29 March 2021, the SO issued a notice of termination pursuant to Clause 51.1(b) of the COC (“
Notice of Termination”), terminating the Appellant’s employment under the contract effective immediately.
Following from the Notice of Default and Notice of Termination, the Respondent proceeded to call upon the BGs.
Originating Summons at the High Court
Aware of the demand for the release of the proceeds of the BGs, the Appellant filed an Originating Summons (“
OS”) at the High Court against the Respondent for, among others, a declaration that it would be unconscionable for the Respondent to call on the BGs and for the Respondent to be restrained from receiving the proceeds of the same. The OS was accompanied by an application for an injunction, which was granted on an
ex parte basis on 1 April 2021. On 4 March 2022, the High Court dismissed the OS and allowed the Respondent’s application to set aside the
ex parte injunction.
The grounds of decision of the High Court on the OS can be summarised as follows:
Aggrieved by the High Court’s decision, the Appellant appealed to the Court of Appeal against the dismissal of the OS and the granting of the Respondent’s setting aside application. Both appeals were heard together by the Court Appeal.
Decision of the Court of Appeal
The Court of Appeal allowed both appeals for the reasons set out below.
The test applicable to restrain the Respondent from calling on the BGs is whether the call would be unconscionable in the circumstances of the case. The Court of Appeal found that the correct general proposition of the law even in Malaysia is that if calls on bank guarantees are too liberally subject to injunctive relief from the courts, the security loses its efficacy. However, the Court of Appeal added that the principle of “
unconscionability” as a separate and distinct ground to restrain a beneficiary from making a call on a performance bond accorded with good commercial sense. This was laid down by the Federal Court in
Sumatec Engineering & Construction Sdn Bhd v Malaysian Refining Co Sdn Bhd [2012] 4 MLJ 1 (FC) (“
Sumatec”).
By applying
Sumatec in this case, the Court of Appeal held that the Respondent’s call on the BGs would be unconscionable as the Covid-19 Act was fully applicable to the parties to the construction contracts and there was in place, a temporary suspension of all contractual obligations.
As such, the Notice of Default and Notice of Termination were null and void under section 7 of the Covid-19 Act. It was undisputed that the Notice of Default was issued despite the Appellant heavily disputing the allegations in the same. The SO thereafter still proceeded with the Notice of Termination. Given that the Notice of Default and Notice of Termination were issued during the period covered by the Covid-19 Act, the obligations of the Appellant under the PWD 203 Contract
2 were suspended during that period and the inability to perform the contract during that period due to the measures prescribed under section 7 of the Covid-19 Act shall not give rise to the other party or parties exercising his or their rights under the contract. As a result, the Respondent is precluded from exercising its right to call for payment under the BGs, as doing so would be unconscionable in the circumstances of the case especially when the Covid-19 Act was in place.
The Court of Appeal referred to section 7 and paragraphs 1 and 2 of the Relevant Schedule of the Covid-19 Act which provide as follows:
Section 7
“The inability of any party or parties to perform any contractual obligation arising from any of the categories of contracts specified in the Schedule to this Part due to the measures prescribed, made or taken under the Prevention and Control of Infectious Diseases Act 1988 [Act 342] to control or prevent the spread of COVID-19 shall not give rise to the other party or parties exercising his or their rights under the contract.”
Paragraphs 1 and 2 of the Relevant Schedule
“1. |
Construction work contract or construction consultancy contract and any other contract related to the supply of construction material, equipment or workers in connection with a construction contract. |
2. |
Performance bond or equivalent that is granted pursuant to a construction contract or supply contract.” |
The Court of Appeal disagreed with the approach taken by the High Court which in interpreting section 7 of the COVID-19 Act, concluded that the Appellant was required to prove, on the balance of probabilities, that it was affected by the measures prescribed under the Prevention and Control of Infectious Diseases Act 1988 before the Appellant can be covered under section 7 of the Covid-19 Act. The Court of Appeal instead took the view that the Covid-19 Act should be interpreted generously considering the special purpose for which the Covid-19 Act was enacted which was to alleviate the suffering of those affected by Covid-19, where movements of labour and materials were severely affected, as in the present case.
Specifically, in relation to the BGs, the Court of Appeal found that the Covid-19 Act was broad enough to cover the reason behind the call, which was the purported termination of the PWD 203 Contract due to the alleged breach of the Appellant. In arriving at its decision, the Court of Appeal followed the Court of Appeal decision of
KNM Process Systems Sdn Bhd v Ceca Gold Company Ltd & Ors [2023] 1 MLJ 814 (CA) where the Court of Appeal in allowing the appeal, held that the fact that a bank guarantee is payable on demand does not prevent a Malaysian company from seeking protection under section 7 of the Covid-19 Act. This included the protection against the call of the on-demand bank guarantee.
Further, the Court of Appeal held that although the BGs in reality are contracts between the Respondent here as the beneficiary and the bank issuing the BGs, the BGs are inextricably linked to the performance of the PWD 203 Contract, under which the BGs were procured as part of the terms of the PWD 203 Contract.
Conclusion
Panzana has shown that the courts are prepared to adopt a generous approach in interpreting section 7 of the Covid-19 Act, prioritising the legislative intent to alleviate the impact of pandemic-related disruptions.
In particular, the Court of Appeal’s approach in
Panzana seems to have departed from the approach taken by for example the High Court in
SN Akmida Holdings Sdn Bhd v Kerajaan Malaysia [2022] 2 CLJ 302 (HC) (“
SN Akmida”). Although
SN Akmida was not considered specifically by the Court of Appeal in
Panzana, SN Akmida provides that the burden of proving the inability to perform contractual obligations under section 7 of the Covid-19 to be fairly high. In
SN Akmida, the High Court held among others that to invoke Section 7 of the Covid-19 Act, a party had to prove on the balance of probabilities that (i) it was unable to perform any contractual obligation whereby the precise duty or duties under contract should be specified; (ii) the inability to perform the contractual obligation arose from one of the categories of contracts listed in the Schedule to Part II of the Covid-19 Act; and (iii) the inability to perform the contractual obligation was due to the measures prescribed, made or taken under the Prevention and Control of Infectious Diseases Act 1988.
Moving forward, parties relying on section 7 of the Covid-19 Act may seek refuge in the generous approach taken by the Court of Appeal in
Panzana, as it signals a greater willingness to consider the practical realities of pandemic-induced disruptions.
Case Note by Muhammad Suhaib bin Ibrahim (Senior Associate) of the Dispute Resolution Practice of Skrine.