Overview

In June 2021, we had published an article on the implication of the Temporary Measures for Reducing the Impact of Coronavirus Disease 2019 (COVID-19) Act 2020 (“the Act”), in particular on Part II pertaining to the temporary relief available to parties who are unable to perform their contractual obligations in the context of debt recovery. Since then, the Courts have seen an increase in cases whereby parties have sought relief under Part II, by virtue of Section 7 of the Act.

This article aims to highlight the Courts’ interpretation and discussions on the elements to successfully claim protection against actions taken over the inability to perform contractual obligations granted under Part II of the Act, specifically Section 7, as well as the exceptions to the same. Kindly note that as at the date of this article, Part II of the Act takes effect from 18 March 2020, and is to remain in operation until 22 October 2022, unless further extended by order published in the Gazette.

Application & Interpretation of Section 7 of the Act

The Courts have generally provided a sense on how Section 7 of the Act will be interpreted and should be applied. In the case of SN Akmida Holdings Sdn Bhd v. Kerajaan Malaysia [2021] MLJU 2449, the High Court stated that in order to successfully invoke the protection under Section 7, the party wishing to invoke the provision, bears the burden of proving on a balance of probabilities and to the satisfaction of the Court, the following elements:

1. Firstly, the party relying on Section 7 would have to prove to the Court that they were unable to perform any contractual obligation, whereby the precise duty under the contract should be specified. In other words, parties who wish to invoke this provision as a defence will need to prove why they were unable to deliver their duties under the contract. It was illustrated in the aforementioned case that by merely blaming their inability to complete their duties due to the pandemic as an excuse is unacceptable, as it has to be supported with clear and sound reasoning.
2. Secondly, the party will need to prove that the inability to perform the contractual obligation arises from one of the categories of contracts in the Schedule to Part II of the Act. Only disputes arising out of contracts listed in the Schedule are covered by the provision, to the exclusion of others. Categories under this Schedule include, amongst others, professional services contracts and lease or contracts pertaining to the lease or tenancy of non-residential immovable property.
3. Thirdly, it is relevant for the party relying on Section 7 to prove their inability to perform such contractual obligations due to the measures prescribed, made or taken under the Prevention and Control of Infectious Diseases Act 1988 (“Act 342”) to control or prevent the spread of COVID-19. The precise measure enforced under Act 342 must be identified and the connection between the aforementioned measures and the party’s inability to perform their contractual obligations must be proved to the Court. As stated in our firm’s June 2021 article, a distinct example of such a measure prescribed by Act 342 is the implementation of the Movement Control Orders and its variations in Malaysia, which have caused significant impacts to various businesses.

In the aforementioned case of SN Akmida Holdings Sdn Bhd, it was insufficient for the plaintiff therein to merely rely on the arguments that there had been a pandemic; the Movement Control Order had been implemented since 18 March 2020; and as a result, the plaintiff was not able to perform its obligations under the contract, to justify the termination of the contract by the defendant as invalid and unconscionable. Based on this instant case, it is clear that more is needed to show for a party to successfully invoke Section 7 of the Act.

Nevertheless, for debt recovery matters in particular, the party seeking to rely on Section 7 of the Act should bear in mind not to fully leverage on the existence of Section 7, and should always make every effort to fulfil its contractual obligations. The key word to note in Section 7 of the Act is ‘inability’ and not mere ‘refusal’ to perform the contract, which appears to have a higher threshold than mere breach. The High Court in the case of Ravichanthiran Ganesan v Lee Kok Sun & Ors [2021] 1 LNS 1581 makes it clear that the Act is to provide for temporary measures to reduce the impact of COVID-19, and that ‘the Act is not a legislation that can be resorted to by any litigant attempting to avoid liability or debt merely because such debt or the enforcement of the same arose during the COVID-19 pandemic’.

Exceptions

Case laws have shown that the Courts are fairly inclined to adopt the literal interpretation of Section 10 of the Act, by upholding that the commencement of legal proceedings or termination of contract carried out between 18 March 2020 to 23 October 2020 would be considered a valid execution of legal rights between the contracting parties.

It is also important to note that Section 7 of the Act is not applicable against the Government. This is by virtue of the aforementioned case of SN Akmida Holdings Sdn Bhd, as the High Court found that if Parliament had intended to include, for instance, Government construction work contracts under Section 7, it would have provided words to that effect in the Schedule to Part II of the Act. By not having done so, the Court declines to hold Government construction work contracts or any of the items in the Schedule whereby it is not expressly mentioned to be a Government contract, are meant to be covered by necessary implication.

Conclusion

Parties wishing to invoke Section 7 of the Act must now bear in mind that the burden of proving the inability to perform contractual obligations is fairly high. In any event, parties should always make every effort to fulfil their contractual obligations and enter into negotiation with the innocent party should there be a foreseeable breach of any contractual obligation(s).

Note: It is advisable that parties keep a proper track record of the actions and measures that were taken throughout the period of the different variations of Movement Control Orders, as it may be helpful and necessary for the purposes of substantiating possible claims and/or defences under Section 7.

Zain & Co. acknowledges Chia Peck Yun (Associate), Hanna Suhaila Haizal (Associate) and Syabil Ahmad Munawir (Pupil-in-Chambers) for their contributions to this article.