THE TEMPORARY MEASURES FOR REDUCING THE IMPACT OF CORONAVIRUS DISEASE 2019 (COVID 19) ACT 2020 [Covid-19 Act] – IMPLICATIONS FOR CONTRACTORS
By Chan Kheng Hoe, Managing Partner / Head of Construction Law, Chong + Kheng Hoe
Introduction
The impact of the Covid-19 pandemic had been severe on the entire economy including the construction industry. On 23.10.2020, the Government of Malaysia gazetted the Covid-19 Act to introduce temporary measures to alleviate the impact of the Covid-19 pandemic. The question though is whether such measures are adequate and have they been introduced too late in the day, bearing in mind that the pandemic started in Malaysia way back in March 2020. As comparison, the Covid-19 (Temporary Measures) Act 2020 of Singapore came into force on 7 April 2020, more than 6 months prior to the Malaysian edition.
This article will first look at parts of the Covid-19 Act which are most relevant to the construction industry. We will then explore the implications of the Act for contractors before examining such implications as to whether they are positive for the industry.
The Covid-19 Act
The Covid-19 Act essentially seeks to accomplish two objectives, namely:
- to temporarily suspend contractual rights for certain types of contracts; and
- to amend specific provisions of law on a temporary basis.
It is intended that the Act would operate for an initial maximum of 2 years, although this timeline may be extended by the Prime Minister. However, not all parts of the Covid-19 Act would be operational for 2 years.
In total, the Covid-19 Act has 19 parts. These 19 parts can be conveniently divided into 3 classifications:
- General and miscellaneous clauses in Parts 1 and 19;
- Relief from inability to perform contractual obligations in Part 2; and
- Temporary amendment of various laws in Parts 3 to 18.
The parts which concern the construction industry the most would be Parts 2 and 11 governing the inability to perform contractual obligations and provisions relating to housing development. We will now focus on the provisions of these 2 parts.
Part 2 Covid-19 Act
Part 2 of the Covid-19 Act is possibly the most important part for contractors. It applies retrospectively from 18.3.2020 and is effective until 31.12.2020. It covers 3 important issues:
- temporary relief for inability to perform contractual obligations due to Covid-19;
- dispute resolution by mediation; and
- saving for exercise of rights prior to publication of the Act.
Section 7 provides that in the event any contracting party is unable to perform its obligations due to Covid-19, then the other party would not be entitled to exercise its contractual rights. All construction contracts, construction consultancy contracts and supply contracts are covered.
There is also a provision for mediation as a means to resolve contractual disputes under section 9. Towards this end, the Minister is expected to draft the necessary regulations for mediation under the Act.
Finally, section 10 is a saving provision whereby any exercise of contractual rights prior to the publication of the Act is deemed to be valid. The wording of this section seems somewhat careless, since surely the validity or otherwise of any exercise of contractual rights depends on the factual matrix of the particular case. Instead, this section should be construed to mean that such exercise of rights, if valid under the contract, would be deemed valid notwithstanding section 7 of the Covid-19 Act.
Part 11 Covid-19 Act
Part 11 of the Covid-19 Act covers housing developments. Specifically, its relates to scheduled contracts under the Housing Developers (Control and Licensing) Regulations 1989. Essentially:
- Section 34 prohibits the imposition of any late payment charges on purchasers from 18.3.2020 to 31.8.2020;
- Section 35 prohibits the imposition of any liquidated damages on developers from 18.3.2020 to 31.8.2020;
- Section 36 excludes the period of 18.3.2020 to 31.8.2020 from the computation of any defects liability period; and
- Section 38 provides that if any claim to the Housing Tribunal would have expired between 18.3.2020 to 9.6.2020, then the said period of claim would be extended to 31.12.2020.
Like Part 2 of the Act, there is also a saving provision in section 37 whereby any late payment charges or liquidated damages paid prior to the publication of the Act would not be refundable. It is important to note that the application of sections 34 and 35 can be extended to 31.12.2020 for specific purchasers or projects upon application to the Minister.
Implications of the Covid 19 Act
Prior to the publication of the Act, there was much clamour for the Act to be passed in the hope that it would bring substantial relief for industry players who are suffering under the weight of the pandemic. Now that the Act has been passed, the question is whether the expectations of industry players on the Act have been well-placed.
Part 2 Covid-19 Act
There are three important points to note for contractors with regard to Part 2 of the Act.
Firstly, the Covid-19 Act only offers temporary relief to contracting parties if its inability to perform its contractual obligations is due to Covid-19 measures. In other words, it is not a blanket relief for all inability to perform contractual obligations. There is no relief granted for any contracting party who had failed to perform its contract prior to Covid-19. Hence, contractors who had already encountered pre-Covid-19 delays or defects may have difficulty to rely on the Covid-19 Act, notwithstanding the fact that the pandemic would almost definitely have aggravated any such prior breaches.
Secondly, the temporary relief works both ways. In other words, it is not just the contractor who could be relieved from performing its contract. The employer may also seek the protection of the Covid-19 Act to be relieved from making payments! In practical terms, the reliefs brought about by the Covid-19 Act would include:
- For the contractor, there can be no calling of performance bod, termination of the contract, appointment of third parties or right of set-off exercised by the employer;
- For the employer, there can be no suspension of works or termination of the contract by the contractor.
Thirdly, the Act merely provides temporary relief. There is no waiver or variation of rights of any sort imposed. Importantly, there is no automatic extension of time granted to contractors, not to mention any loss and expense claims. Hence, whilst contractual rights are temporarily suspended for the period of operation of the Covid-19 Act, such exercise of rights are merely deferred and not denied. This means that after the breathing space afforded by the Covid-19 Act, all rights come back into play. The period of application of the Covid-19 Act merely operates as a time for parties to take stock, plan their works, and perhaps mediate a win-win way forward.
Part 11 Covid-19 Act
Part 11 of the Act extends the defects liability period for end-purchasers. However, such extension does not apply between developers and contractors. Essentially, the developer would end up bearing an extended defects liability period which would not be covered under the construction contract. Meanwhile, the expiry of the defects liability period and the release of second moiety of the retention sum for contractors remain governed strictly by the construction contract which is not affected by the Covid-19 Act.
Review of the implications
It is regrettable that the Covid-19 Act expressly provides that relief from contractual obligations is only available if one’s ability to perform the contract is affected due to Covid-19 measures specifically. Granted that there may have been prior defects and delays and Covid-19 should not be used as a “get out of jail free” card for delinquent contractors. However, the fact of the pandemic means that contractors who already have prior defects and delays would not be in the position to remedy its defects or accelerate its works anyway. Hence, the Covid-19 pandemic would definitely affect the said contractor despite its breach not being due to Covid-19 measures. If the scheme of the Act is to recognize that the Covid-19 pandemic is such an exceptional event, why then would the relief not be extended to all and sundry, at least for a limited period of time.
As to the application of the Act for all parties (including the employer), would the Covid-19 Act be a defence to any payment claim? Of course, the reality is that claims under the Construction Industry Payment and Adjudication Act 2012 are currently unable to proceed due to the vacancy of the position of Director of the Asian International Arbitration Centre. However, in the event that a director were to be appointed prior to the end of the year, would this Covid-19 Act pose a new defence in adjudication claims?
Contractors must also be prepared that when the validity of Part 2 of the Covid-19 Act expires on 31.12.2020, there may be an avalanche of claims against the contractor for delayed and defective works. Contractors should be vigilant at this point in time to ensure the timely progress of their works, whilst maintaining open communications with both the employer and the contract administrators. Otherwise, there may be sudden calls on performance bonds, notices of default, resort to set-off provisions or sudden appointments of third parties come January 2021.
Finally, it is good for contractors that there was no extension of defects liability period for contractors. At the very least, contractors would not be subjected to additional rectification costs and can claim the second moiety of retention sum when the original defects liability period expires.
Conclusion
The Covid-19 Act is best seen as merely affording a breather for all parties. It is as if a time-out has been called. Parties who take advantage of this time-out to plan their works, mediate issues with their counterparts and seek win-win solutions on moving forward may find the time-out to be beneficial. However, if the time-out is not used optimally, the deferment of contractual rights would only lead to an escalation of issues come January 2021.
It would have been good if the time-out was for a much longer period than the 2+ months afforded.