What Are The Contractual Risks That Are Common During The COVID-19 Crisis?

Worry about contractual risk during the COVID-19 crisis? Book a consultation with a lawyer today:

The COVID-19 pandemic has caused chaos in many aspects of our lives. Chief amongst it is that a lot of our agreements with one another has been adversely affected by it due to multiple factors.

In this article, we will briefly mention some of the contractual risks that a party is bound to face and whether there is a safeguard to such a risk.

What are some of the contractual risks that are common during this COVID-19 pandemic?

While there are many contractual risks that come with the current crisis, some of the more common ones are (in a scenario where people suing each other to ensure they receive what is legally theirs):

  1. Parties claiming that a contract is frustrated (when the contract is impossible to perform due to events that could not have been contemplated by the parties of a contract)1 and therefore is under no obligation to honour a contract/ agreement;
  2. A tenant/ landlord claiming “force majeure” (an unforeseeable event takes place, such as war, outbreak of diseases, natural disaster, etc) and terminate a tenancy/ lease contract and claim for damages;
  3. A house buyer is unable to obtain his house on the date of vacant possession.

Are there safeguards pertaining to the risks?

There are, in fact, certain safeguards pertaining to such risk. Chief amongst it is the introduction of the Act below:
Temporary Measures For Reducing The Impact Of Coronavirus Disease 2019 (COVID-19) Act 2020

Question: TLDR – What does it entail?
Answer: The Act modified contractual provisions in certain acts to ensure that the laws take into factor the current COVID-19 pandemic crisis in Malaysia and how it might affect the contractual relationship between parties.

Question: What are the affected contracts?
1. Construction related contract (construction work, consultancy, the supply of construction materials, equipment or workers);
2. Performance bond or equivalent that is granted pursuant to construction/ supply contract;
3. Professional services contract;
4. Lease or tenancy (only for a non-residential immovable property);
5. Event(s) contract;
6. Tourism contract and contract for promoting tourism; and
7. Religious pilgrimage contract.

Question: What does the law say about these contracts?
Answer: The opposite party cannot exercise/ enforce his rights (terminate, rescind, claim for damages etc.) if one party is unable to perform its contractual obligations due to the COVID-19 pandemic, subject to the modified laws prescribed under the Act.

Question: How long will the Act last?
Answer: Initially, the Act was supposed to only last until the end of 20202. However, it has since been extended (twice) to last to the end of 20213.

Get Template Letter to Landlord During MCO:

Are there examples of cases pertaining to this matter? Has anyone relied on COVID-19 Act?

  1. In WPP Business Services Sdn Bhd v Cosmopolitan Avenue Sdn Bhd4, WPP Business and Cosmopolitan Avenue entered into a settlement agreement (that stem from a dispute between the two parties) whereby Cosmopolitan Avenue agreed to refund half of the deposit of the tenancy agreement to WPP Business via 6 post dated cheques.

    However, only three can be encashed as the other three were cancelled by Cosmopolitan Avenue. Cosmopolitan Avenue, amongst others, claim that with the enforcement of the COVID-19 Act, the settlement agreement has been frustrated and void5 and they therefore are not obligated to settle the remainder sum.

    The court disagreed with Cosmopolitan Avenue’s contention, noting that the doctrine of frustration does not apply as:
    1. A settlement agreement does not fall under any categories of the contracts that are affected by COVID-19 Act (coupled with the fact that it was Cosmopolitan Avenue who breached the settlement agreement by dishonouring the three post-dated cheques);
    2. An agreement does not become frustrated merely because it becomes difficult to perform/ Just because one party cannot pay his debt.
  2. In Dato’ Vijay Kumar Natarajan & Anor v Malaysia Airlines Bhd6, Dato Vijay brought a legal suit against Malaysian Airlines to seek refunds for the flight tickets that Dato Vijay had bought but was rescheduled twice (in which Dato Vijay asked for refund during the second reschedule) due to the COVID-19 pandemic.

    The court did not entertain Dato Vijay’s shenanigans. In coming to its decision, the court noted that the pandemic has adversely affected not only the aviation industry but has wrecked the economy and caused upheavals in the lives of Malaysians as well. Essentially, this whole saga is out of Malaysia Airlines control (which also qualifies as an “extraordinary circumstances” within the Malaysia Aviation Industry regulations where an airline can choose/ not obliged to provide compensation) and they should not be penalised for it.

Worry about contractual risk during the COVID-19 crisis? Book a consultation with a lawyer today:

Other related articles:

  1. What Happens To A Contract During COVID-19 Period If It Is Silent Or Does Not Have Any ‘Force Majeure’ Clause?
  2. What Do You Need To Know Before You E-Sign / Digital Sign Any Documents?

1. WPP Business Services Sdn Bhd v Cosmopolitan Avenue Sdn Bhd [2020] MLJU 1042.

2. Temporary Measures For Reducing The Impact OF Coronavirus Disease 2019 (Covid-19) Act 2020.

3. Temporary Measures For Reducing The Impact OF Coronavirus Disease 2019 (Covid-19)(Extension of Operation)(No..2) Order 2021.

4. [2020] MLJU 1042.

5. Under section 57 (2) of the Contracts Act 1950.

6. [2021] MLJU 407.