‘Legal shield’ for contracts

  • Corporate News
  • Thursday, 16 Apr 2020

Chang: The government has granted financial assistance in various economic stimulus packages to contain, sustain, supplement, stabilise, resuscitate and “re-start” businesses in these extraordinary times.However, one aspect of “relief” that has been overlooked is the provision of a “legal shield” to people and businesses who are unable to fulfill their contractual obligations due to restrictions during the movement control order (MCO),

THE coronavirus disease (Covid-19) has derailed the world. The current word bandied about is “unprecedented”. Such description is fitting as the devastating effects of this pandemic can be seen and felt on a macro and micro scale, without respect for borders, sovereignty, wealth or status.

Covid-19 has disrupted supply chains, manpower, businesses and societies to such an extent some experts said not seen since World War II.

Provide a legal ‘shield’ to Covid-19 events

The government has granted financial assistance in various economic stimulus packages to contain, sustain, supplement, stabilise, resuscitate and “re-start” businesses in these extraordinary times.

However, one aspect of “relief” that has been overlooked is the provision of a “legal shield” to people and businesses who are unable to fulfill their contractual obligations due to restrictions during the movement control order (MCO), now extended to April 28.

This “legal shield” offers legislative protection from legal entanglement to help them to return to normalcy.

Contracts or agreements are part and parcel of our lives. However, the inability to perform or fulfill any contractual obligation during the MCO because lives and businesses have come to a grinding halt within 24 hours from March 17,2020 was certainly not within the contemplation of most Malaysians, be it individuals, businesses or corporations. It would be utterly unjust to hold them strictly liable for their failure to do so, under the circumstances.

The government vide Parliament should provide a “legal shield” to offer legislative protection from legal consequences arising from failures or inabilities to perform their contractual obligations and to allow additional opportunities, or time to remedy, or rectify such deficiencies, or shortcoming by individuals or businesses, before the other party to a contract proceeds to enforce their legal rights under such a contract.

These rights could range from the right to forfeit a deposit, or to impose interest, or other forms of monetary penalties; for financial institutions, the right to recall a performance bond under a default, recovery of outstanding loans, foreclosure or auction of properties, recovery of motor vehicles for hire-purchase loans.

Covid-19 (Temporary Measures) Act, 2020 (Singapore)

On April 7, Singapore’s Parliament passed the Covid-19 (Temporary Measures) Act, 2020 (Act) which was promptly assented to by the President and gazetted on April 9. It became operational on April 7.

This Act is temporary in nature and is intended to address events related or affected by Covid-19 before certain dates stipulated within the Act.

The Act applies to a party to a scheduled contract who is unable to perform an obligation that is to be performed on, or after Feb 1, or where the inability is materially caused by a Covid-19 event.

The Act prohibits the other party from commencing or continuing an action in court, arbitration or enforcement of immovable property.

This suspension from performance and enforcement is temporary in nature where the prescribed period of relief is six months.

In addition to a suspension, there is also an extension of limitation for filing of actions. The Act has also modified the Bankruptcy Act to increase their monetary limits, and the prescribed period for any action has been increased from 21 days to six months.

In tandem, their Companies Act and Insolvency, Restructuring and Dissolution Act have also been modified with increases to the monetary threshold and extension of time from three weeks to six months before a company is treated as unable to pay their debts.

If relief is given under this Act, it is an offence for any individual or company to take legal action against the non-performing party if that party has given a notice of his inability to fulfil the contract due to the Covid-19 event. There are, however, many other areas covered by the Act that we may not be receptive of.

Formulate protection laws ala Malaysian style

The protective legislation, as passed in Singapore to protect contracting parties, could be localised to suit our Malaysian context.

Under the Singapore Act, it is a panel of assessors who will decide on the relief/s granted under the Act. The decision of such assessor is not appealable.

On this, we feel that instead of a panel of assessors, it should be the Malaysian Courts (of Law) who should resolve disputes involving Covid-19 cases and to grant whatever relief/s, or to decide whether such cases fall within the ambit of a Covid-19 event, or whether performance was materially impacted by Covid-19.

There should be a formation of a temporary designated High Court, for a prescribed period, to preside over all Covid-19 related cases. After all, our Federal Constitution prohibits exclusion of jurisdiction of the Courts. Furthermore, the appointment of an assessor in the Malaysian context may be politically tainted, or industry-influenced, and the result of which, justice is denied to the aggrieved party.

The Covid-19 procedure should be simplified with a checklist of documents to be furnished to the presiding Judge to evaluate, assess and decide. Lawyers appointed to present and argue their client’s case should even limit their professional fees to “not in excess of RM3,000”, as otherwise it would defeat its purpose.

This is a temporary and speedy relief to facilitate regularisation of performance and is not meant to cause further hardship to a weaker party, or parties already suffering from possible financial and emotional distress.

Majid India under lockdownMajid India under lockdown

Absence of the “force majeure” clause

Most legal experts are trying to determine if Covid-19 falls within the legal concept of “force majeure”, and therefore, applies to contracts which provide for a “force majeure” event.

A “force majeure” clause is a contractual provision which allows the non-performance of one, or more of the contractual obligations, by a party, or parties, due to unforeseen events beyond the control of both parties. Wars, riots, strikes, civil commotions, natural disasters, epidemics, riots, strikes, and government intervention prevent the performance of the contractual obligations.

But there are none in numerous contracts, namely, tenancy agreements, leases, and the statutory sale and purchase agreement regulated under the Housing Development (Control & Licensing) Regulations, 1989. It would be unfair to both the buyers and housing developers to enforce strict terms of the contract, or to insist on performance during the MCO and to an extent, post-MCO.

In the absence of a “force majeure” provision within our scheduled housing agreements, there arises practical issues which both developer and purchaser would encounter and if unresolved, would lead to unnecessary legal challenges by both developer and purchaser.

These are issues such as the ability of the purchaser to take vacant possession (VP) under the now-extended MCO within the 14 days from the developer’s notice (otherwise deemed to have taken VP) and the commencement of the “Defects Liability Period” of 24 months. The clock has already started “ticking” from the date of the notice of the VP.

The purchaser would be at the losing end in such a scenario. On the other hand, any delay by the developer to complete construction works due to the MCO and deliver the VP within the agreed completion date would consequently mean the developer has to pay “additional” liquidated ascertained damages (LAD).

Since construction work is not within the “essential services” category, it is understandable that the developer will also likewise suffer financial hardship through the additional delays and payment of the LAD.

To overcome most, if not all adverse consequences caused by Covid-19, we would recommend a form of mandatory “force majeure” relief (temporary) which applies to situations where a party’s ability to perform their contractual obligations is hampered due to the MCO and Covid-19.

Under our proposed Covid-19 Act, safeguards to the developer and purchaser can range from duration of relief, prohibition from penalisation (termination/ determination/ forfeiture/levy of penalties, etc) due to breach of obligations under a contract or failure to perform and/or entitlement.

Let’s exercise restraint and accept adjustment

We anticipate that post-MCO and Covid-19, there will be a period of adjustment to a “new normal” environment. A reasonable time is required for the market players “to pick themselves up and get back on their feet” before any real activities will take effect.

With the threat of a looming local and global recession, it is important for our country to focus on getting back on the economic bandwagon. The enactment of a temporary legal “shield” in the form of a Covid-19 Act would help to protect and allow businesses and even investors to continue their activities with confidence.

Resources are much slimmer now with Covid-19 and these resources should be channeled for economic rejuvenation, not litigation. We believe Malaysia has the resilience to survive the MCO and regain its status as a progressive and dynamic powerhouse.

The proposals above are written in simple language, succinctly to the issues at hand and we suggest that a focus group of legal, economic and financial brains be appointed to explore and study all possible angles of legal entanglements that may plague post-MCO, Covid-19 and beyond.

Datuk Chang Kim Loong is the secretary-general of the National House Buyers’ Association, www.hba.org.my, a non-profit, non-governmental organisation manned by volunteers. His email: info@hba.org.my. The views expressed here are his own.

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