The COVID-19 pandemic has undoubtedly brought about disruptions and consequences that many were unprepared to deal with. In an employment law context, one of the issues that emerged from these uncertainties relates to contractual obligations – are parties still bound by the employment contract when events such as COVID-19 make the performance difficult or impossible to perform?

Generally, there are 2 provisions under the law which provide some form of contractual relief on the occurrence of unforeseeable events:

  1. Force majeure
  2. Frustration

However, whether these concepts are applicable in an employment law context may be a different issue all together.

 

Force majeure

Force majeure generally refers to unforeseeable events or circumstances that render parties’ obligations under the contract impossible to perform. The effect of a force majeure event is usually to discharge a party from his contractual obligations.

However, to invoke force majeure, it must be expressly provided for in the contract. As the operation of force majeure depends on what parties have agreed to, parties can determine what amounts to force majeure.

In the context of the COVID-19 pandemic, it is possible to invoke a force majeure clause if there are wordings such as “pandemic”, “epidemic” or “disease” in the contract, but in the absence of express reference to “disease” or other words to the effect, whether COVID-19 constitutes a force majeure event would ultimately depend on the language used in the clause and the interpretation thereof.

That being said, force majeure clauses seldom appear in employment contracts, due to the nature of the contract.

Frustration

In the absence of a force majeure clause, it is still possible for parties to be discharged from their contractual obligations as a result of the effects of the COVID-19 pandemic.

Under s57(2) of the Contracts Act 195, “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.”

The above provision captures what is known as the “doctrine of frustration”. The doctrine of frustration discharges parties from their contractual obligations where the contract has become impossible or radically different from what was originally undertaken.

In the employment context, a contract can be frustrated if the circumstances are such that it is physically impossible for the contract to be performed (e.g. where the illness of an employee lasts or is likely to last for a prolonged period).

The doctrine of frustration of an employment contract is mostly invoked in circumstances involving medical conditions where the “illness is of so prolonged a nature as to prevent the employer from getting substantially what he has bargained for”. The rationale for this is that the employer cannot be expected to go to unreasonable length in accommodating someone who is not able to carry out his job to the full extent. However, in addition to the principles of doctrine of frustration, courts have held that employers must demonstrate that they have acted reasonably in accordance with its obligations of social consciousness. This includes, among other things, offering an alternative employment to the employee, to consult with the employee about the matter, etc.

While medical illness is often cited as the reason the contract is frustrated, it is possible for other situations to fall under the doctrine of frustration. For example, where an employee is convicted and incarcerated in prison for a prolonged period. The employment contract may be frustrated as one could reasonably find that there had been a radical change in what had been undertaken by the parties in the employment contract.

The duty of an employer to act reasonably in the circumstance, should similarly apply during the COVID-19 pandemic. Thus in relation to restrictions in movements (e.g. travel restrictions which prevent certain employees from reporting for work at assigned locations) , or employees infected with the virus, companies must address such issues with regard to the principles mentioned earlier. 

Dismissal of Employees based on Frustration or Force Majeure

In an unfair dismissal claim, the Industrial Court has the power to decide on the matter without regard to technicalities and legal form, and therefore reliance on contractual principles may be insufficient to justify a dismissal. The Industrial Court will still examine whether the employer had just cause and excuse to dismiss the employee.

As such, prior to dismissing an employee, an employer should first assess whether they have just cause and excuse, and not merely invoke contractual principles like “force majeure” and “frustration” to dismiss the employee.

For example, if the employer’s business is struggling due to the pandemic which has resulted in a surplus of labour, dismissal of employees can be legitimately done through restructuring or retrenchment. There is no need for employers to perform legal gymnastics to categorise the dismissal under force majeure or frustration.

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This article was written by Donovan Cheah (Partner) and Adryenne Lim (Senior Legal Executive). Donovan has been named as a recommended lawyer for Labour and Employment by the Legal 500 Asia Pacific 2017, 2018, 2019 and 2020, and he has also been recognised by Chambers Asia Pacific and Asialaw Profiles for his employment law and industrial relations work. 

Donovan & Ho is a law firm in Malaysia. Our practice areas include employment law, dispute resolution, tax advisory and corporate advisory.  Have a question? Please contact us.

 

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