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THE IMPORTANCE OF FORCE MAJEURE: KEY POINTS




What is Force Majeure?


The term ‘Force Majeure’ has been defined in Black’s Law Dictionary, as ‘an event or effect that can be neither anticipated nor controlled’. It is a contractual provision allocating the risk of loss if performance becomes impossible or impracticable, especially as a result of an event that the parties could not have anticipated or controlled.


Under the Malaysian contract law, there is no definition of “Force Majeure”; at the same time, there is no regulation in Malaysian law that prohibits parties from providing for Force Majeure events, namely, that certain external events may have the effect of ceasing contractual performance or releasing the parties from their responsibilities under a contract.


A Force Majeure clause must be stated in the contract


It is a prevalent understanding that when a contract is put in writing, the intention of the parties must be found within the four corners of the contract itself. Thus, the Force Majeure clause can only be used and relied on when it is clearly stated in the contract. This is affirmed in the Court of Appeal case of BIG Industrial Gas Sdn Bhd v Pan Wijaya Property Sdn Bhd and Another Appeal [2018] 3 MLJ 326 [1].


The notion above was also upheld in the High Court case of Gogung Fusion Restaurant (KLCC) Sdn Bhd & Ors v Suria KLCC Sdn Bhd [2021] MLJU 2345[2] which explains the force majeure law as follows:-


“It is trite law that for a party to rely on an alleged Force Majeure event, the said event must be specifically provided in the contract and is not implied by law…”


Events capable of constituting Force Majeure


The events to invoke Force Majeure must be unforeseeable which would inevitably affect or prevent the parties’ ability to perform their obligations under a contract. In short, the events that have transpired must be beyond their control.


As an example, in Malaysia, if we were to peruse the Covid-19 pandemic (Covid-19) and the Movement Control Order (MCO) that lasted from 18.3.2022 to 1.11.2021, many contractual provisions set forth a specific list of Force Majeure events which are considered to be events beyond the control of the parties, such as “pandemics”, “epidemics” or “diseases.”


Note: A specific reference to a “pandemic” will make it easier to bring a Force Majeure claim but at times you might still be required to provide other criteria for a Force Majeure test to be fulfilled.


If a particular provision does not express language to the effect stated above, then it will be necessary to consider whether Covid-19, or its impact on a business is captured by a different occurrence, such as an “action by government”, “Act of God,” or “war”. Most Force Majeure provisions contain a “catch-all” broad language in apropos to events which are “outside the reasonable control of the party affected”.


Given the unprecedented nature of the Covid-19 outbreak and in light of the MCO, it is likely that Covid-19 would have constituted a Force Majeure event within the ambit of “outside the reasonable control of the party affected”, because the stark reality is that parties have no control whatsoever on the occurrence and spreading of the Covid-19 virus and/or the government’s imposition of the MCO, which resulted in closure and/or restriction of business hours, trading, manufacturing and other economic activities.


Does Force Majeure consider dislocation of economy?


It is important to consider however that the relevant Force Majeure event need not be Covid-19 itself. Instead, in most cases it is the consequences of Covid-19 and its impact upon the capability of the affected party to fulfil its contractual obligations that would be relevant.


While the concept of Force Majeure encompasses dislocation of business by various actions and events, the general rule is that it does not include “conditions of business climate leading to a depressed economy” as stated in Global Destar (M) Sdn Bhd v Kuala Lumpur Glass Manufacturers Co Sdn Bhd [2007] MLJU 91[3].


However, in the case of Malaysia Land Properties Sdn Bhd v Tan Peng Foo [2013] 1 MLRA[4], the Court of Appeal broadened the scope of interpretation on Force Majeure events and concluded that Force Majeure can indeed include business interruptions that are disrupted by various acts and events.


“The words force majeure have been held in many cases to have a more extensive meaning than ‘act of God’ or ‘vis major’... while the concept of force majeure does not encompass conditions of business or economic climate leading to a depressed economy, it would include dislocation of business by various actions and events.”


Is there a mitigation obligation under a Force Majeure clause?


When assessing what is required to satisfy an obligation to mitigate the effects of a Force Majeure event, the precise wording of the clause is of paramount importance. The wording will differ from contract to contract. Fairly typical boilerplates have varying standards of mitigation obligations. Some of the familiar terms that may be included (but not limited) are:-

  1. “take reasonable steps”

  2. “to use ‘reasonable endeavours”;

  3. “to take ‘all reasonable endeavours”;

  4. “the prescribed mitigation steps”.

In some clauses, a Force Majeure provision may be silent on the obligation to mitigate the effects of the event. However, a lack of such express mitigation obligation does not necessarily translate to no mitigation obligation at all. In practice, Courts have been known to amplify such obligation in the event the contract is silent.


In the case of Intan Payong Sdn Bhd v Goh Saw Chan Sdn Bhd [2005] 1 MLJ 311[5] the High Court had enunciated the following:-


“it is trite that a party relying upon a force majeure clause must prove the facts bringing the case within the clause. He must therefore prove the occurrence of one of the events referred to in the clause and that he has been prevented, hindered or delayed, as that case may be from performing the contract by reason of the event. He must further prove that his non-performance was due to circumstances beyond his control and that there were no reasonable steps that he could have taken to avoid or mitigate the event or its consequence”.


In addition, in RDC Concrete Pte Ltd v. Sato Kogya (S) Pte Ltd and another appeal [2007] SCGA 39[6], the Singapore Court of Appeal decided that one of the principles applied to the party relying on Force Majeure is that the particular party must show that it has taken all measures to avoid the use of "force majeure" or reduce and/or mitigate its effects


As heavily implied in the cases above, the standard of the mitigation obligation is likely to be a reasonable one and thus the parties affected by the Force Majeure event will have to demonstrate that they have taken reasonable steps to avoid or mitigate its effects.


Key aspects to keep in mind while drafting a Force Majeure provision


Taking into account of all the above, the following aspects should be canvassed summarily while drafting a Force Majeure provision in a contract:-


a. A tabulation of enumerating events which would constitute a Force Majeure event, based on the

commercial understanding between the parties in the contract and the nature of the contract.


Note: the said list can be exhaustive or non-exhaustive in nature.


b. Setting forth clear actions required to be undertaken by the parties’ to invoke the provisions of Force

Majeure by providing for issuance of notice to the other side informing them about Force Majeure.


c. Consequence of occurrence of a Force Majeure event, including requiring parties to mitigate the

outcome of the said event, excusing the affected party from performing the contract in whole or in part

or excusing a party from delay in performance or providing them with an option to suspend or claim an

extension of time for performance or giving the opposing party a right to terminate the contract before

further incurrence of losses.


Conclusion


The benefit of a Force Majeure clause is that it allows the parties involved to fashion a cogent proportion of the risk imposed by events that are unknown and/or uncontrollable. Ultimately the validity of the Force Majeure depends on the wording and provision of the clause within the contract. It is critical to note that Courts will also consider the nature of the contract and whether parties have taken steps to mitigate risks and undertake to perform the contract.


If there’s anything we have learned in the last couple of years is that there are bound to be substantial obstacles that stand in the way of parties’ usual method of seeking to prove frustration of contract. Therefore, it is always best to consider a Force Majeure clause in a contract, regardless of its size or complexity.


[1] BIG Industrial Gas Sdn Bhd v Pan Wijaya Property Sdn Bhd and Another Appeal [2018] 3 MLJ 326

[2] Gogung Fusion Restaurant (KLCC) Sdn Bhd & Ors v Suria KLCC Sdn Bhd [2021] MLJU 2345

[3] Global Destar (M) Sdn Bhd v Kuala Lumpur Glass Manufacturers Co Sdn Bhd [2007] MLJU 91

[4] Malaysia Land Properties Sdn Bhd v Tan Peng Foo [2013]1 MLRA

[5] Intan Payong Sdn Bhd v Goh Saw Chan Sdn Bhd [2005] 1 MLJ 311

[6] RDC Concrete Pte Ltd v. Sato Kogya (S) Pte Ltd and another appeal [2007] SCGA 39


Authored by Charumathy Nair


Edited by Kevin Wu


Kindly note that this legal article does not, and is not intended to, constitute formal legal advice by the Firm, instead all information, content and materials available on this site are for general informational purposes only. If readers require further clarification or legal advice, please email office@kevinwuassociates.com

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