Chan Kheng Hoe:
COVID-19 and Contractors’ Dilemma

Chan Kheng Hoe is currently the sole-proprietor of Messrs Kheng Hoe Advocates. He focuses on construction dispute resolution and represents clients in arbitration, litigation, adjudication and mediation of construction disputes. He is also an arbitrator; adjudicator and mediator on the AIAC panel; as well as a trainer in mediation for the Malaysian Mediation Centre—particularly instrumental in setting up the mediation service for the Master Builders Association of Malaysia, where he sits as a committee member in the Contracts and Practices Committee.

Kheng Hoe has been awarded fellowships in the Chartered Institute of Arbitrators, Malaysian Chartered Institute of Arbitrators, Malaysian Society of Adjudicators and Hong Kong Institute of Construction Adjudicators. He regularly speaks and writes on various topics related to construction law and volunteers as a mentor in the Bar Council Mentors’ Project, in order to help younger lawyers find their footing in the profession.

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The onset of the COVID-19 pandemic and the imposition of the Movement Control Order (MCO) by the Malaysian government has brought about unprecedented trauma for the construction industry. In this article, we will consider the most common issues faced by contractors during these challenging times. As such, we will be looking at the Pertubuhan Arkitek Malaysia (Malaysian Institute of Architects) or PAM Standard Form 2018 (Without Quantities), henceforth PAM 2018; and Public Works Department of Malaysia or PWD 203 standard forms, henceforth PWD, as they are among the most commonly-used standard forms of contracts in Malaysia.

Also read: COVID-19 Pandemic: How contractors could minimise risk

Is a contractor affected by the MCO entitled to extensions of time?
Under PAM 2018, a contractor is entitled to apply for extension of time pursuant to Clause 23.1 if there is a relevant event as stated in Clause 23.8. One of the relevant events in Clause 23.8 is force majeure. In Article 7, this refers to any circumstances beyond the control of the contractor, including those caused by epidemics. So, it is quite clear that a contractor would be entitled to an extension of time due to the COVID-19 pandemic and the MCO. It must be noted that it is a condition precedent under the PAM form for the contractor to make a formal application for an extension of time. Otherwise, the contract deems it that no extension would be needed.

In addition to that, the contractor can also rely on the need to comply with changes to the laws, regulations, by-laws, terms and conditions imposed by any relevant authorities. The difference between these two sub-clauses is that the extension of time granted in reliance on force majeure would depend on the subsistence of the pandemic/epidemic of COVID-19, in so far as it affects the progress of works, whilst the extension of time granted in reliance on changes in conditions imposed would depend on the subsistence of the MCO and any enhanced conditions. Hence, the amount of extension of time granted under these two different sub-clauses may differ. The contractor would therefore be wise to apply for extension of time under both sub-clauses concurrently.

The definition of force majeure in the PWD form, unfortunately, does not include epidemics or pandemics. However, Clause 43.1 allows the contractor to obtain an extension of time for its inability for reasons beyond its control and which could not reasonably have been foreseen at the date of closing of tender to secure goods, materials and/or services essential to the proper carrying out of the works. Clearly, the MCO would affect the supply chain of the contractor, entitling it to extension of time.

The major difference between force majeure in the PAM form and extension of time due to inability to secure goods, materials and/or services in the PWD form is that the entitlement of the contractor to extension of time for force majeure under the PAM form is dependent on the epidemic, whilst the entitlement of the contractor under the PWD form is dependent on the disruption to the supply chain. Therefore, it may be likely that a contractor utilising the PAM form could be entitled to more extension of time than a contractor utilising the PWD form, seeing that the COVID-19 pandemic may well extend beyond the period when the MCO is in place.

Is a contractor affected by the MCO entitled to claims for loss and expense?
Whilst it is quite apparent that extensions of time would be granted, however, the same cannot be said for claims for loss and expense.

Under the PAM form, a claim for loss and expense must be for one of the events set out in Clause 24.3. However, force majeure is not a relevant event in so far as claims for loss and expense go. This is likely due to the fact that force majeure is considered a neutral event due to no party’s fault, and therefore, any associated costs ought to fall where they lie. Such a position may be reasonable between a contractor and a sub-contractor, but it is not so reasonable between an employer and a contractor. This is because the employer typically does not carry out any physical works, and therefore the only party who would suffer any costs for a neutral event would naturally be the contractor. Between a contractor and a sub-contractor, both parties do carry out physical works and it may well be that each party ends up bearing part of the costs.

However, some architects had issued instructions to suspend work at the time when MCO was issued. Such an instruction would have been given pursuant to Clause 21.4 of the PAM form. In the event that the architect did issue such an instruction, then the suspension period under the MCO becomes an event for which loss and expense is claimable, pursuant to Clause 24.3. This would be unfortunate for the employer, since the employer’s liability to pay loss and expense arose only because the architect chose to administer the contract in a particular manner, namely by issuing a suspension order under Clause 21.4. However, the author has seen a number of cases where such a suspension order was precisely issued.

Other occasions that entitle the contractor to claim for loss and expense for the MCO period under the PAM form would include: claim for delay on the part of other contractors engaged by the employer (in the event the contractor’s work is dependent on other contractors completing their works, and obviously these other contractors would have been prevented from completing their works by reason of MCO); claim for delay or failure to supply materials and goods which the employer had agreed to supply for the works, in the event such an agreement exists since clearly the employer would be unable to supply the materials and goods by reason of the MCO.

The PWD form similarly allows for a claim for loss and expense only if there had been a suspension of the works by the short order. Such an entitlement to claim would fall under Clause 44.1 of the PWD form.

Can the construction contract be deemed frustrated due to the MCO?
The frustration of a contract is a serious matter. It brings all future obligations of all parties to an immediate end. Before a contract can be considered to be frustrated, the supervening event must be neutral in nature (as in no party is at fault) and must have radically altered the nature of parties’ obligations to the point that a contracting party can say that its obligations are now far different from what he agreed to undertake in the first place.

The mere fact of the MCO would not be sufficient to be an event of frustration, because the MCO is temporary in nature and relatively brief in the bigger scheme of things. Furthermore, a contractor ought to be entitled to extension of time for the period of the MCO at the very least, hence it cannot be said that the suspension of works during the MCO is an event of frustration.

However, if terms and conditions are then imposed by the authorities for the continuation of the work, and such terms and conditions turn out to be onerous, the contractor can arguably contend that its obligations have radically changed and therefore the contract is frustrated. Bear in mind that this is only an arguable position since nothing is for certain until a decision is made eventually by a court of law. However, considering the standard operating procedures imposed by the authorities during the MCO, it is apparent that such procedures would drastically increase the time required to complete the contract, increase the contractor’s costs and perhaps even render the contract to be unprofitable. Under such circumstances, a contractor may opt to consider the contract frustrated as it provides a better option than to proceed with the contract at a loss.

Can a contractor terminate the construction contract (other than by reason of frustration) if the MCO is prolonged?
Under the PAM 2018 form, the contractor can terminate the construction contract pursuant to Clause 26.1 for reasons other than frustration provided the suspension of works was effected by way of an instruction from the architect, and the period of suspension exceeds the period of delay stated in the appendix of the contract (usually three months). Other than this, the contractor cannot rely on the COVID-19 pandemic or the MCO as a reason to unilaterally terminate the contract. There is also no provision for unilateral termination that would be applicable to the contractor under the PWD form.

Who would be responsible for the additional costs incurred due to the new conditions imposed by the authorities as a result of the MCO?
A contractor can only claim for additional costs if it falls within one of the categories of loss and expense allowed under the contract. The imposition of conditions by the authorities, unfortunately, is not one of them. In fact, compliance with all laws, by-laws, regulations and any conditions imposed by the authorities would ordinarily fall under the obligation of the contractor anyway, and hence it would seem that all additional costs incurred by reason of new conditions imposed by the authorities would more likely than not be borne by the contractor.

Can a contractor refuse to apply for a permit to resume work?
Under the PAM form, the contractor has a duty to use its best endeavours to prevent or reduce delay in the progress of the works (Clause 26.3). Therefore, if a contractor refuses to apply for a permit to resume work, it may seem that the contractor has not fulfilled its duty to use its best endeavours. The PWD form obligates the contractor to take ‘all reasonable steps’ to avoid or reduce delays (Clause 43.0). In this regard, the PWD form gives the contractor more leeway because a contractor may argue that it is not reasonable to expect it to resume works under the conditions and standard operation procedures imposed pursuant to the MCO.

What is your final message for contactors and employers?
The COVID-19 pandemic and the ensuing MCO have truly put the contractor between a rock and a hard place. On the one hand, the contractor needs to proceed with the project regularly and diligently. On the other hand, there is a need to maintain the health of all workers, whilst controlling the increased costs due to the new conditions imposed by the authorities. Such challenging circumstances can lead to substantial disputes down the road. It may be good for contractors to engage with their employers to chart an amicable way forward before any dispute erupts.

Contractors and employers who cooperate with each other, with the understanding that both parties would have to suffer some losses along the way, may well avoid much more substantial losses down the road. The truth of the matter is that for projects caught by the COVID-19 pandemic and the MCO, the focus should be on minimising costs, risks and time, rather than maximising profits. This pandemic truly calls for generosity of spirit from each one of us. – Construction+ Online