Clause 7 Covid-19 Bill: Complete Answer or Half-Measure?
19 August 2020
The Temporary Measures for Reducing the Impact of Coronavirus Disease 2019 (COVID-19) Bill 2020 (“Bill”) was tabled for First Reading at the Parliament on 12 August 2020.
The Preamble to the Bill states that it is to provide for temporary measures to reduce the impact of COVID-19 including to modify the relevant provisions in 14 existing Acts of Parliament including the Limitation Act 1953, the Insolvency Act 1967, the Hire-Purchase Act 1967, the Consumer Protection Act 1999, the Distress Act 1951, and two State Enactments.
The Bill will come into operation on the date that it is published in the Gazette and will have retrospective effect for some of the reliefs where expressly provided for. Where the Bill is silent, it shall remain in operation for two years from the date of its publication. The Prime Minister is empowered to extend its operation by order published in the Gazette. Such order may be made more than once but shall be laid before the Dewan Rakyat as soon as practicable after its publication.
This article examines the temporary relief from inability to perform contractual obligations embodied in Clause 7 of the Bill and the relevant issues which may arise from this clause.
Clause 7 (Inability to perform contractual obligation)
Clause 7 of the Bill provides temporary relief to parties who are unable to perform any contractual obligation (“defaulting party”) arising from any of the categories of contracts specified in the Schedule due to the measures prescribed, made or taken under the Prevention and Control of Infectious Diseases Act 1988 (the “Act”) to control or prevent the spread of COVID-19. Clause 7 prevents the other party (“non-defaulting party”) from exercising his rights under the contract.
This relief has retrospective effect and is deemed to have come into operation on 18 March 2020 and shall remain in operation until 31 December 2020 (unless extended by order published in the Gazette by the Minister charged with the responsibility for law).
The categories of contracts set out in the Schedule to Part II of the Bill (which may be amended by the Minister by order published in the Gazette) are as follows:
- Construction work contract or construction consultancy contract and any other contract related to the supply of construction material, equipment or workers.
- Performance bond or equivalent that is granted pursuant to a construction contract or supply contract.
- Professional services contract.
- Lease or tenancy of non-residential immovable property.
- Event contract for the provision of any venue, accommodation, amenity, transport, entertainment, catering or other goods or services including, for any business meeting, incentive travel, conference, exhibition, sales event, concert, show, wedding, party or other social gathering or sporting event, for the participants, attendees, guests, patrons or spectators of such gathering or event.
- Contract by a tourism enterprise and a contract for promotion of tourism in Malaysia.
- Religious pilgrimage-related contract.
Application of Clause 7
A non-defaulting party is not entitled to exercise his rights under these contracts if the defaulting party satisfies the following criteria:
- There must be an inability to perform a contractual obligation by the defaulting party;
- The contractual obligation must arise from a contract that is within the categories of contracts specified in the Schedule;
- The inability to perform a contractual obligation must be due to the measures prescribed, made or taken under the Act. Note that this includes all the regulations made by the Minister and any direction issued by the Director General for the purpose of preventing and controlling the infectious disease, pursuant to the Act.
Clause 9 of the Bill provides for a mediation process which is voluntary in nature. Clause 9 states that any dispute in respect of any inability to perform any such contractual obligation may be settled by way of mediation. The Minister may determine the mediation process which includes the appointment of a mediator, role of a mediator, conduct of mediation and conclusion of mediation.
Upon the conclusion of a mediation and the reaching of an agreement by the parties regarding a dispute, the parties are required to enter into a settlement agreement which shall be in writing and signed by the parties. The mediator shall authenticate the settlement agreement which shall be binding on the parties and furnish a copy of the agreement to the parties.
- Clause 7 does not stipulate whether there is a requirement that the contractual obligation that the defaulting party is unable to perform is one which is to be performed on or after a specific date. Nonetheless, the relief would presumably cover contractual obligations required to be performed during the operation period of this relief, i.e. from 18 March to 31 December 2020.
- The categories of contract set out in the Schedule do not include some types of contracts which may require this temporary relief, in particular, contracts that may affect individuals and small to medium enterprises. These categories of contracts include:
- Contract for the grant of a loan facility by a bank or financial institution
- General and non-construction related supply contract
- Contract for the sale of goods (that are not covered under the Consumer Protection Act 1999)
- Contract for the provision of (non-professional) services
- It is interesting to note that Clause 7 has stipulated the measures prescribed, made or taken under the Act as the so-called “force majeure” event for this relief to be invoked, instead of a wider catch-all event, such as “any COVID-19 event”, as seen in the Singapore COVID-19 (Temporary Measures) Act 2020 (the “Singapore Act”). The effect of this is two-fold:
- It may not be wide enough to cover many contractual obligations affecting individuals and small to medium enterprises, e.g. payment obligations arising from existing contracts, as strictly speaking, the measures prescribed, made or taken under the Act do not prevent parties from performing such obligations; and
- The measures prescribed, made or taken under the Act may affect the performance of contractual obligations only for a limited time period, e.g. during the Movement Control Order, all businesses (save for those performing essential services) were ordered to be closed, but this order has since been lifted by the Government. Strictly speaking, there is no longer any inability to perform contractual obligations, such as to deliver goods to the other party.
- It is anticipated that there will be many disputes as to the meaning of “due to”. These are words that one may typically see in a force majeure clause, which is generally strictly construed by the courts. In order to successfully invoke a force majeure clause, a party is required to show that the inability to perform or delay in performance of contractual obligations has been caused by the force majeure event. There will be a need for the court’s guidance on this.
- The Bill does not provide for any consequences for acting in contravention of Clause 7. Under section 8 of the Singapore Act, any person who, without reasonable excuse, contravenes the Act shall be guilty of an offence and shall be liable on conviction to a fine not exceeding SGD1,000.
- There is no mechanism to determine whether the case in question is one to which Clause 7 applies. Under the Singapore Act, the party seeking relief under the Act must serve a notification for relief to the other party to the contract. The parties may then apply to the Registrar of assessors to appoint an assessor to make a determination as to whether the case is one to which the relief applies.
- Clause 9 provides for a voluntary mediation process to determine any dispute. Given the nature of the mediation process, which is not mandatory, parties will likely continue to refer their disputes through the court or arbitration process.
- The Bill contains a saving provision (“Clause 10”) which provides that “… any contract terminated, any deposit or performance bond forfeited, any damages received, any legal proceedings, arbitration or mediation commenced, any judgment or award granted and any execution carried out for the period from 18 March 2020 until the date of publication of this Act shall be deemed to have been validly terminated, forfeited, received, commenced, granted or carried out.” As the Bill is unlikely to come into operation until late September this year, Clause 10 could drastically curtail the efficacy of Clause 7 as it may result in a surge of legal actions being commenced by non-defaulting parties to preserve their existing contractual rights by relying on Clause 10.
Clause 7 in its current form does not appear to fully alleviate the financial distress caused by the COVID-19 pandemic to individuals and small to medium enterprises. It is rather disappointing that the draftsmen have chosen to limit the relief to the effects of the measures prescribed, made or taken under the Act
, instead of the wider “any COVID-19 event”. In effect, the relief in Clause 7 is not as far-reaching as anticipated and may be considered, at best, a statutory force majeure clause
. It is doubtful that this relief would even be adequate to operate as a moratorium for all actions and legal proceedings during the operational period. The lack of a binding dispute resolution mechanism may also potentially expose this relief to abuse by contracting parties. It is hoped that there will be some amendments made to the Bill before it is passed by the Parliament.
Alert prepared by Sharon Chong Tze Ying (firstname.lastname@example.org), a Partner of Skrine.
Section 5 of the Singapore COVID-19 (Temporary Measures) Act 2020 states that the obligation is one “that is to be performed on or after 1 February 2020”.
This omission is probably due to the fact that financial institutions in Malaysia have granted a six-month moratorium on repayment of loans and borrowings to their customers (except those who elect not to accept the moratorium).
To become law, the Bill will have to be passed by the Dewan Rakyat (House of Representatives) of the Malaysian Parliament which is presently in session until 27 August 2020 and by the Dewan Negara (Senate) of the Malaysian Parliament which will meet from 2 to 23 September 2020, and thereafter to receive Royal Assent from the Yang di-Pertuan Agong whereafter the Bill will be published in the Gazette