COVID-19: Is It A Force Majeure Event Or Ground For Frustration Of Contract?

The recent COVID-19 outbreak which has been declared a pandemic by the World Health Organization on 12 March 2020 has caused major disruptions in the business world. In an effort to minimize the outbreak, the Government of Malaysia has on 16 March 2020 issued a Movement Control Order ("MCO") which entails inter alia, closure of non-essential businesses, restriction of travel in and out of the country and restriction of movements throughout Malaysia from 18 March to 31 March 2020.

Some of the measures implemented under the MCO have raised a lot of concerns, especially for businesses. In this Alert, we will briefly discuss the impact of the COVID-19 outbreak on the performance of contract, in two situations, one where the contract contains a force majeure clause, and the other, where such clause is absent.

Force Majeure Clause

A force majeure clause is a common contractual provision found in most (but not all) contracts. It is not implied by law and has to be expressly incorporated into a contract by agreement of parties.

A force majeure clause caters for certain unforeseeable events that would render the parties' obligations under the contract impossible to perform. The wording of the clause is important as it has to specify events where performance is "prevented", "hindered", or "delayed". Such events may include "acts of God", "epidemics", "natural disasters" and "quarantine", depending on how the clause is drafted.

A party seeking to invoke a force majeure clause bears the burden of showing that an event has occurred which is beyond his reasonable control, and which actually causes a delay or inability to comply with the obligations under the contract. By invoking this clause, the party may relieve himself from the performance of his obligations totally or for a specific period, as provided in the contract.

A force majeure clause also usually confers a right on the counterparty to terminate the contract if the force majeure event subsists beyond a specified period. It may even provide that the contract is automatically cancelled (see Continental Grain Export Corp v S.T.M Grain Ltd [1979] 2 Lloyd's Rep 460 and Classic Maritime Inc v Limbungan Makmur Sdn Bhd and another, [2019] 2 All ER 622 (QB)).

Is the COVID-19 outbreak a force majeure event?

There is no blanket rule as to whether the COVID-19 outbreak can be considered a force majeure event. It depends entirely on the wording and scope of the force majeure clause in the contract. Words...