There has been a drastic increase of searches on terms related to force majeure provision during the Covid- 19 outbreak reported by Law Insider.
What is a Force Majeure clause?
A force majeure clause in a contract is created or designed with specific intention to excuse the parties from liabilities as a result of outside events that could not be controlled such as act of god, pandemic and etc. It allocates the risks in cases where performance becomes impracticable or impossible. For force majeure clause to be applicable, the event must be beyond the control of the affected party, unavoidable, and unforeseeable.
Aspects of its operation
There are two aspects to the operation of force majeure clauses:
(i) The definition of force majeure events (to specifically include the series of events that are intended to be covered by this clause ie. pandemic, riot, war, earthquake, flood, hurricane and etc); and
(ii) The operative clause that sets out the effect on the parties’ rights and obligations if a force majeure event occurs (to emphasize on the allocation of risks).
To cover Covid- 19 pandemic in the clause
In order for event such as Covid- 19 pandemic to be covered under the force majeure clause, specific terms such as “epidemic” or “pandemic” are advised to be clearly stipulated therein to avoid ambiguity.
How to apply the force majeure clause?
The are few considerations to be taken into account: (i) the party seeking to rely on the force majeure must show that the event is one of the force majeure events stipulated in the clause ; (ii) the occurrence of such event is beyond of his/her control; and (iii) the performance is rendered impossible due to the event.
The party must also show that all reasonable steps have been taken to avoid or mitigate the event or its consequences. If the party concerned does not take reasonable steps to avoid the event in question, it cannot be said that the occurrence of the event was beyond the control of such party thus the clause would not apply (Holcim (Singapore) Pte Ltd v. Precise Development Pte Ltd [2011] 2 SLR 106).
What if there is no force majeure clause?
If there is no force majeure clause in the contract, the affected party may try to rely on other provisions in the contract for potential solutions. If the contract does not provide any such solutions, the party may in certain circumstances be possible to rely on the doctrine of frustration (Section 57(2) of the Malaysian Contracts Act 1950 [Act 136]). Frustration occurs when the event become impossible to perform at no fault of either party. The party is unable to rely on frustration if his/her obligations are merely difficult or expensive to be performed.
Furthermore, frustration may also be commercially undesirable in some circumstances, since its effect, regardless of the wishes of the parties, is to bring the contract to an end immediately.
Therefore, it is good to have the force majeure provision in a contract where the affected party may rely on during the Covid- 19 outbreak especially when the performance of a party may possibly be restricted due to the lockdown imposed by the government. Generally, the clause will allow the performance or obligation of the affected party to be suspended with risks allocated at the parties’ wish until the performance becomes possible. The clause may also provide a door for termination if the force majeure event continues for a period which is intolerable by the parties.
By Darren Lam