The recently announced movement control order by the government of Malaysia to curb the spread of the Covid-19 virus will very likely affect businesses, already struggling and worried about their contractual liabilities, order fulfillment obligations and ongoing committed overheads, just to name a few. We have put together an FAQ to provide business owners with a guide that might help them navigate their business throughout this trying time.
What should businesses do in relation to our customers, suppliers, landlords, service providers? Can we suspend or cancel confirmed orders or deliveries?
Firstly, check your contracts for any ‘force majeure’ clause. If there is one, consider if the ‘force majeure’ clause covers events like “pandemics” “epidemics” or “diseases” for this Covid-19 situation, or the catch all phrase “beyond the reasonable control of the parties”.
Check if these clauses provide for specific timelines, notification or procedures to suspend your contractual obligations. Also check your “termination clause” in your agreement to determine if it allows for ‘no fault termination’ or termination ‘due to force majeure’, which may also help in your negotiations discussed below.
For tenancy agreements, the ‘suspension of rent’ clauses do not typically cover such situations as they are often limited to events which results in property damage rendering the property uninhabitable.
What if my contract is silent or does not have a ‘force majeure’ clause?
If the contract does not contain a force majeure clause, the contract could be discharged on the grounds of ‘frustration’, upon which the contract will become void. A contract is said to be ‘frustrated’ where there is a change in the circumstances supervening or subsequent to the formation of the contract which renders a contract legally or physically impossible to perform (Section 57, Contracts Act 1950).
For a contract to be discharged by frustration:
- The event, or change in circumstances, upon which a party claims to have frustrated the contract, must not have been one for which provisions has been made in the contract;
- The event, or change in circumstances, must be one for which the party is not responsible for or self-induced; and
- The event, or change in circumstances, must be such that renders the performance of a contract radically different from what was originally undertaken, to the extent that the court must find it unjust to enforce the original promise (Guan Aik Moh (KL) Sdn Bhd v Selangor Properties Bhd [2007] 4 MLJ 20)
However, the doctrine of frustration can only be applied within very narrow limits. A contract is not frustrated merely because it becomes difficult (or more expensive) to perform (Pacific Forest Industries Sdn Bhd v Lin Wen-Chih [2009] 6 MLJ 293). Businesses intending to claim frustration of contract in light of the Restricted Movement Order should do so with caution, and ensure that the Restricted Movement Order not only makes it difficult, inconvenient, or onerous to perform a contract, but that it renders the performance of a contract impossible.
What critical terms should we re-negotiate with our contracting parties (or landlords)?
Consider establishing written contact with your contracting counter-parties and re-negotiate terms in good faith, citing ‘force majeure’ event or ‘events beyond your reasonable control’. Consider if you need to re-negotiate any of these terms (whichever relevant to you):
- extension of time to deliver / perform obligation
- suspension of specific obligations
- reduction in delivery quantity / scope of work
- termination of contract if the situation persists for XX period of time
- reduction or waiver of late interest penalties or agreed damages
For tenants, do consider re-negotiating with your landlord on any (or a mix) of the following terms:
- suspension of rental
- deferment of rental
- reduction of rental
- waiver of late payment interest & landlord’s assurance not to exercise a termination clause due to late rental payment
- waiver of claims for ‘unexpired rental’ or ‘forfeiture of deposits’ as damages by the landlord, if, in the worst-case scenario, tenant must terminate the tenancy prematurely
What steps should we take to minimize damages / mitigate our contractual risks?
Inform the counter party of the reasonable steps that your business is taking or has taken to mitigate the potential breach, example:
- we have sourced for alternative suppliers
- our team is working on a rotational / from home basis to reduce disruption
- we are using facilities in different locations
- we will deliver in batches / staggered deliveries
- we will focus on delivering only critical items / supplies
How should we conduct negotiations and keep records?
Picking up the phone to call the decision makers will certainly help in the re-negotiation of terms. However, do follow up by recapping any agreed terms and record the discussion with these parties on any suspension, waiver of penalties / interest, deferment or revision of new terms granted. Better have a written record to refer to than leaving it to just an oral agreement. Also maintain contemporaneous records to show that the breach of contract is beyond your control. (i.e. newspaper records of the movement control order, internal announcement of office closures etc).
Notifying your counter-party in writing to give them the earliest opportunity to mitigate their risks and losses arising from such potential or foreseeable breaches, by sourcing from alternative suppliers or reducing their own delivery orders etc.
What should we do if we are in the midst of negotiating a new agreement?
Businesses negotiating contracts should ensure their “force majeure” clauses are carefully crafted to cover the current Covid-19 pandemic, government ordered lock-downs or movement controls. The clauses should also provide for clear procedure for a party to avail itself of any force majeure provision. The parties’ respective rights and remedies upon a force majeure event should be expressly provided for.
For sellers / suppliers, in the event the supply chain is disrupted, consider having provisions which allows the supplier to delay the delivery on reasonable grounds. Negotiate terms for extensions of time, and under what circumstances will an extension be allowed. For buyers, negotiating for a clear cancellation and returns policy will be crucial to safeguard your interests in the event the orders couldn’t be fulfilled. Having terms which allow for suspension or rescheduling of deadlines may be useful in the event the authorities implement more stringent or ongoing restrictions.
If there is a risk that the agreement will be terminated, the termination clause should address each party’s rights and liabilities arising from termination pursuant to such force majeure events.
What else can we do to prepare our business for the ongoing COVID-19 situation?
Unlike insurance coverage on flood, fire, damages to the property or theft, general business insurance may not cover events such as a virus outbreak like Covid-19.
Fortunately, there are other initiatives in the country that would be helpful to support SMEs during this time of difficulty:
Bank Negara Malaysia (BNM) stimulus
- Special Relief Facility (SRF)
- In light of the Covid-19 outbreak, BNM has established a RM 2 billion Special Relief Facility to alleviate short-term cash flow problems faced by SMEs. This will be offered through commercial banks as loans for working capital at an interest rate of 3.75% per annum to borrowers.
- The loan tenure offered under the SRF will be up to 5.5 years including a 6 months payment moratorium with a maximum loan size of RM 1 million per SME.
- Agrofood
- In an effort to increase food production, BNM has also expanded fund utilisation for SMEs who are involved in relevant food sectors.
- Each SMEs can obtain financing of up to RM 5 million for a maximum 8 years tenure at a financing rate of 3.75%.
- SME Automation and Digitalisation Facility (ADF)
- RM 300 million was allocated to encourage SMEs to automate processes and digitalise operations to improve productivity and efficiently. Financing can be used for the purchase of equipment, machinery, ICTs and other intangible asset to enhance productivity and efficiency.
- Each SMEs can obtain financing of RM 3 million for a period of 10 years at a 3.75% interest per annum.
- Financial Institutions
- Certain banks and financial institutions (e.g. Maybank, RHB Bank, Hong Leong Bank, Alliance Bank) have also come up with financial relief such as restructuring and refinancing loan repayments, including a moratorium on loan repayments of up to 6 months. Business owners are encouraged to speak to their respective bank branch officers to discuss the financial relief available to overcome the challenges during this time.
- Other General Measures
- Business owners may consider to negotiate with suppliers or find alternative suppliers which may provide better support for the business. Business owners should act promptly to improve cash flows and manage the expectations of employees.
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This article was written by Shawn Ho. Shawn leads the corporate practice group of Donovan & Ho, which has been recognised as a recommended firm for Corporate, Mergers & Acquisitions by the Legal 500 Asia Pacific 2018. IFLR1000 has also ranked us a Notable Firm 2019.
Our corporate practice group advises on corporate acquisitions, restructuring exercises, joint venture arrangements, shareholder agreements, employee share options and franchise businesses, Malaysia start-up founders and can assist with venture capital funds in Seed, Series A & B funding rounds. Feel free to contact us if you have any queries.
