MALAYSIAN HIGH COURT CLARIFIES COVID-19 ACT RELIEF FOR PARTIES UNABLE TO PERFORM CONTRACTUAL OBLIGATIONS

The Malaysian High Court has clarified when a party will be considered unable to fulfil its contractual obligations for the purposes of relief against contractual claims under Section 7 of the Temporary Measures for Reducing the Impact of Coronavirus Disease 2019 (COVID-19) Act 2020 (Covid-19 Act). While there have been previous cases where parties have sought Section 7 relief, Malaysian decisions have provided limited guidance on how the statutory relief should be approached. The Ravichanthiran decision clarifies the test to be met by parties seeking to rely on the provision and affirms the Malaysian courts' approach of keeping parties to their contractual obligations. The High Court's decision is timely as the operation of the relief was recently extended to 31 December 2021.

Ravichanthiran a/l Ganesan v (1) Lee Kok Sun (2) L & L Brother Engineering Services (3) Shaik Saleem Bin Shaik Mohd Daud

FACTS

The High Court was requested to stay the execution of a Sessions Court judgment pending its appeal. The Plaintiff commenced a civil action against three defendants for sums arising from his rendering of legal services, including unpaid legal fees.  In turn, the Defendants brought a monetary counterclaim. The Sessions Court found in favour of the Defendants and dismissed the Plaintiff's claim, leading to the Plaintiff's appeal to the High Court alongside the instant application for a stay of execution of the subordinate court's decision.

The application was dismissed. However, a notable argument raised by the Plaintiff in the stay application was its necessity since Section 7 of the Covid-19 Act prevented the Defendants from executing the Sessions Court judgment.

SECTION 7 OF THE COVID-19 ACT

As background, the Covid-19 Act came into force on 23 October 2020. It was enacted to support the recovery of the Malaysian economy and to mitigate the financial impact of the Malaysian government's efforts to contain the pandemic on businesses. The Covid-19 Act does so by providing, through several Parts, multiple protections against civil claims to parties that have been affected by recent administrative responses to the pandemic as set out in the Prevention and Control of Infectious Diseases Act 1988 (PCIDA).

Part II of the Covid-19 Act, which was the focus in Ravichanthiran, provides relief from civil actions to parties that have been unable to perform their contracts due to the PCIDA. This relief may only be raised in relation to agreements falling within the categories set out in the Schedule to Part II of the Covid-19 Act, which includes construction work or consultancy contracts, performance bonds or equivalent contracts granted pursuant to construction or supply contracts, professional services contracts and leases or tenancies of non-residential immovable properties.

Ravichanthiran focused on the following provisions of Part II:

• Section 7 which disallows non-defaulting parties from exercising contractual rights against a defaulting party whose inability to perform the contract was due to measures prescribed, made or taken under the PCIDA.
• Section 10 which limits the temporal scope of Section 7. Part II of the Covid-19 Act takes effect retrospectively from 18 March 2020 (Section 5 of the Covid-19 Act). Section 10 provides that any contract terminated, deposit or performance bond forfeited, damages received, legal proceedings, arbitration or mediation commenced, judgment or award granted and execution carried out for the period from 18 March 2020 until 23 October 2020 (ie. when the Covid-19 Act was gazetted) shall be valid.

HIGH COURT'S ANALYSIS OF SECTION 7 RELIEF

The High Court examined Sections 7 and 10 of the Covid-19 Act and found that the Plaintiff could not rely on the relief under Section 7 for two reasons. The first was of a technical nature in that the Plaintiff failed to raise statutory relief in the evidence underlying the application, particularly in the Plaintiff's affidavits, and therefore could not be entertained. Second, and more significant, the High Court clarified that in any event, the Plaintiff failed to meet the two elements required to rely upon Section 7 relief. This appears to be the first Malaysian decision elaborating on the test to be fulfilled to invoke Section 7 relief.

The following observations by the High Court are noteworthy:

• A party seeking to rely on Section 7 must show that an inability to perform the contractual obligation in dispute; and that such inability was due to the measures prescribed, made or taken under the PCIDA to control or prevent the spread of COVID-19.
• Although the Covid-19 Act does not define what constitutes an "inability…to perform any contractual obligation", the principles expressed by the Malaysian Federal Court in SPM Membrane Switch Sdn Bhd v Kerajaan Negeri Selangor [2016] 1 CLJ 177 indicate that a mere breach of contract is insufficient to establish an "inability" under Section 7.
• A defaulting party cannot rely on an express declaration that it is unable to perform the impugned contractual obligation. Rather, the party must establish that "facts make it inevitable that the party cannot perform". Accordingly, a mere statement in the Plaintiff's affidavit that he was unwilling to pay the counterclaim sum as the Sessions Court judge had erred in her decision did not amount to an "inability".
• The Covid-19 Act cannot be relied upon by litigants "attempting to avoid liability or debt merely because such debt or the enforcement of the same arose during the Covid-19 pandemic". This reflects the Malaysian court's recent inclination towards rejecting attempts by litigants to rely upon the Covid-19 pandemic to avoid contractual obligations.

KEY TAKEAWAYS

Ravichanthiran provides welcome guidance on how the Section 7 relief will be approached. Although Section 7 grants much needed protection to Malaysian businesses against the financial impact of government restrictions to contain the Covid-19 pandemic, the raising of the defence can create uncertainty in contractual transactions. The High Court's decision clarifies the strict scrutiny of parties' circumstances it will undertake and adds to the recent line of Malaysian judgments that illustrates the court's preference towards requiring parties to perform their contracts. Notable examples are:

• WPP Business Services Sdn Bhd v Cosmopolitan Avenue Sdn Bhd [2021] MLJU 1042, where a landlord sought Section 7 relief against its failure to make necessary payments under a settlement agreement with a tenant. The Sessions Court rejected the landlord's attempt to rely on Section 7 relief. It found that the agreement in question did not fall within Part II of the Covid-19 Act and that the landlord failed to show that it was facing financial difficulties due to business suspension and cash flow problems.
• Ginma Industries Sdn Bhd v Xin He Feng (M) Sdn Bhd [2021] MLJU 1675, where a lessee raised Section 7 relief against a lessor's claim for outstanding rental payments. The Magistrates Court found against the leasee as the leasee did not adequately show that it was facing financial difficulties due to the measures taken to control the spread of Covid-19. Notably, the Magistrates Court stressed that Section 7 of the Covid-19 Act had to be interpreted in a literal and tight manner.

The statutory relief is available until 31 December 2021. Following Ravichanthiran, parties seeking to rely upon the statutory relief should ensure that they maintain a document trail showing the circumstances that "make it inevitable that [they] cannot perform" their contractual obligations.

For further information, please contact Peter Godwin, Lim Tse Wei, Kin-Hoe Loi or your usual Herbert Smith Freehills contact.

Disclaimer

Herbert Smith Freehills LLP is licensed to operate as a Qualified Foreign Law Firm in Malaysia. Where advice on Malaysian law is required, we will refer the matter to and work with licensed Malaysian law practices where necessary.