- SOP has to be observed at construction site.
- Where progress of work severely impacted by imposition of sop, contractor must carry out delay analysis and apply for EOT.
- Worker tested positive on site, site shall be shut down and contractor shall apply for EOT based on the contract.
- Contractor shall not suspend work by using MCO and CMCO as the reason.
- Additional cost incurred due to SOP imposed may be claimable if provided under the contract.
- Contractor may not be able to use CMCO and MCO as reason to unilaterally terminate the contract unless the contract is frustrated.
- The contractor shall be prepared for the challenges that will be faced upon MCO lifted and continuation of CMCO.
- Idling cost for machineries and rental due to MCO and CMCO may not be claimable.
- Contractor All risk insurance will not cover contractor’s loss and expense due to MCO and CMCO.
Impact of Covid-19 (MCO & CMCO) on Contractor in Malaysia
Q1. What are the SOP have to be observed at construction site?
Based on the “Prosedur Operasi Standard (SOP) Dan Garis Panduan Kebenaran Beroperasi Serta Pergerakan Pekerja Bagi Projek Pembinaan Dalam Tempoh Perintah Kawalan Pergerakan (PKP) Fasa Ke-4”1, the contractors are required to take measures like taking daily temperature of each employee reporting to site, to make sure social distancing is being observed on site and all vehicles carrying the contractor’s employees in and out of the site must be thoroughly disinfected. Any failure to observe SOP will cause the site to be forced shut down by the government.
Q2. My progress of work at site was impacted severely due to SOP imposed by government and flow of work was disrupted, what should I do?
A delay analysis should be carried out to identify the cause of delay and the effect of such delay as a result of the implementation of SOPs and extended effect of the global lockdown(i.e CMCO & MCO 2.0)
Q3.What happened if a worker on my site tested positive for COVID-19 infection?
It is undeniable that the site will be shut down for a period of time for disinfection and the work progress may be delayed. Therefore, the contractor should read their contract in detail and see if such event could be claim for extension of time where the cause of delay is either due to pandemic or MCO. If the contract provide for such event to be claimed as EOT, then the contractor must apply for EOT in accordance to the contract.
Q4. In view of the imposition of MCO and CMCO and the procurement of materials and labour is difficult, can a contractor then suspend its works?
The contract may do so only if the contract provides for self-suspension due to pandemic. However, most of the standard form contracts in Malaysia did not provide for such conduct when time is of essence and the contractor may face imposition of LAD in the absence of valid cause of events for EOT. For example, under clause 26.3 of PAM form of contract, a contractor has a duty to use its best endeavours to prevent or reduce delay in the progress of the works. Thus, such conduct may be contrary to the agreed term under Clause 26.3 of PAM.
Q5. Can a contractor claim for additional costs incurred due to SOP or conditions imposed by authorities due to COVID-19?
The contractor must first determine if the executed contract provides for loss and expense claim. If it is in affirmative, then the contractor should further determine if such addition costs is claimable as loss and expense based on the contract. In any event, most of the standard form contract expressly require the contractor to comply with all laws and regulations and hence it may be arguable that any SOP or measures imposed by the government shall be part of the contractor’s obligation and no additional costs whatsoever can be claimed by the contractor.
Q6. Can a contractor terminate the contract in view of never ending CMCO and MCO?
One may argue that a contract can be terminated by way of frustration due to MCO, but the fact remains that a contractor cannot to its own whims and fancies unilaterally terminate the contract by using COVID-19, MCO or CMCO as the reason for termination. Some of the contract like PWD form does not even provide for unilateral termination by the contractor, thus the contractor may not rely on COVID-19, MCO or CMCO to terminate the contract unless frustration can be proven.
Q7. What is doctrine of frustration?
a. Doctrine of frustration is provided in Section 57(2) of the Contracts Act 1950 where it states that:
“A contract to do an act which, after the contract is made,
becomes impossible, or by reason of some event which the promisor could not prevent, unlawful, becomes void when the act becomes impossible or unlawful.”
b. When a contract is frustrated, the performance of the contract ends permanently.
Q8. Would Covid-19 and/ or the implementation of MCO constitute an event which will lead to frustration of the construction contract?
a. In order to rely on Section 57 (2) of the Contracts Act 1950, the contracting party must fulfil the elements as set out in the case of Guan Aik Moh (KL) Sdn Bhd & Anor v Selangor Properties Bhd  4 MLJ 20 as follows:
- The event upon which the promisor relies as having frustrated the contract must have been one for which no provision has been made in the contract. If provision has been made, then the parties must be taken to have allocated the risk between them.
- The event relied upon by the promisor must be one for which he or she is not responsible. Self induced frustration is ineffective.
- The event which is said to discharge the promise must be such that renders it radically different from that which was undertaken by the contract. The court must find it practically unjust to enforce the original promise.
b. It should be noted that a contract is not frustrated merely because it becomes difficult to perform (see Pacific Forest Industries Sdn Bhd & Anor v Lin Wen-Chih & Anor  6 CLJ 430).
c. In view of the implementation of MCO and when the contract does not provide for such event, the first element as stated above would be satisfied. The second element would also be satisfied as no party to the contract was responsible for MCO. However, the party to the contract has to satisfy the third element where such party would have to prove that MCO has rendered the contractual obligation radically different from which was undertaken by the contract and unjust to enforce it.
d. With the possibility of the MCO being extended and with more and more business are able to resume businesses, it remains uncertain whether the doctrine of frustration could be relied on for MCO which is temporary in nature.
e. However, if the MCO is being extended and those businesses which are still being prohibited to operate, may seek to rely on such doctrine if such party could prove that its contractual obligations have become radically different from what was undertaken by the contract.
Q9. What are the possible challenges which could be faced by the contractors that would affect the performance of their contractual obligations even after the MCO is being lifted?
a. Reduction in the numbers of workers due to workers becoming unwell or having to self-isolate which may lead to suspension of work until further notice;
b. Break of chain of supply of material as many supply chains consist of small and medium-sized enterprises (SMEs) which might be facing cash-flow problem and unable to meet their commitments;
c. There will be non-payment and/ or delay in payment which leads to contractors facing cash-flow problem and having difficulties in running their construction companies and carrying out construction work;
d. There may be imposition of additional health and safety measures with the aim to protect workers from contracting the coronavirus and such additional measures may obstruct the progress of construction works.
Q10. Are idling cost for machineries and rental claimable due to MCO and CMCO?
The contractor must refer to the contract if the right to claim for any additional cost incurred is provided under the contract. In the absence of such clause, it is unlikely that the idling cost is claimable unless it can be proven there is element of act of prevention by the employer where the employer’s or architect’s instruction has caused the contractor unable to work and resulted in idling cost.
Q11. Is Contractor All Risk (CAR) insurance able to cover a contractor’s loss and expenses due to MCO and CMCO?
It is unlikely that CAR can cover contractor’s loss and expenses as CAR insurance cover only material damage and third-party liability but not in relation to tangible damage to property.
THIS FAQS ARE PREPARED AND PUBLISHED BY MESSRS GAN & ZUL, ADVOCATES & SOLICITORS, KUALA LUMPUR.
-CONSTRUCTION & ALTERNATIVE DISPUTE RESOLUTION DIVISION-
Ben Lee Kam Foo (Partner)
Head of Dispute Resolution
Arbitrator & Adjudicator
Fellow of ADR, AIAC
Cross Border Taxation Planning
Phang Ting Hong (Associate)
Construction Dispute Resolution Division