MahWengKwai & Associates (“MWKA”) hosted its inaugural online talk, touching on a popular subject in the construction industry. The topic “How should Contractors in the Construction Industry Manage the Problems arising from the COVID-19 MCO?” was delivered over two days, on 2.4.2020 and 3.4.2020. The online talks were well received, with almost 300 attendees tuning in on both days.
Summary of the Online Talks
The Movement Control Order (“MCO”) has forced most businesses in the construction industry to suspend their operations. According to the FAQs issued by the Ministry of Works on 18 March 2020 (updated on 24 March 2020) and 1 April 2020, only construction works that fall within the definition of “critical works” may continue during the MCO period. All other construction and maintenance works were required to be suspended.
On Day 1 of the online talk, Ms Christine Toh, Partner of MahWengKwai & Associates, discussed common concerns and suggestions on how contractors can best respond to the problems arising from the MCO. Her talk mainly focused on force majeure, extensions of time (“EOT”), loss and expenses, and frustration of contract. She also addressed the practical steps to take during and after the MCO.
On Day 2 of the online talk, Ms Christine Toh took the floor first, and she answered the questions asked by participants from Day 1, who were primarily contractors. Many of the questions were related to force majeure, suspension of works, loss and expenses, and EOT clauses across the various standard form contracts. The session was then followed by an interview with Mr John Wong, Director of Charlton Martin Consultants Malaysia. The interview addressed common questions on the protection mechanisms available to contractors, to guard their interests from the effects of MCO.
Frequently Asked Questions
1. Under common law and the PAM Sub-contract, are contractors allowed to claim for loss and expenses?
Generally, the right to claim for loss and expenses is a contractual right. There is no common law remedy to claim for loss and expenses.
Clause 24 of PAM Sub-contract (both the 2006 and 2018 forms), allows the contractor to claim for loss and expenses.
2. Because of MCO, contractors are still spending on non-productive resources, e.g. idle plants and equipment, including payment of rent. What are the ways to recover from such losses and expenses?
First of all, you need to determine if you have the contractual right to claim for loss and expenses arising from the COVID-19 MCO. Assuming that you have the right to claim, we advise that you submit your claim based on the terms and conditions of the contract.
3. What are the examples of items that can be claimed as loss and expenses arising from the MCO?
- Demobilisation and remobilisation costs
- Site Staff salaries, accommodations
- Rental for forklift, excavator, other plant and equipment
- Rental for sheet piles
- Costs of extended insurance coverage
4. Can the contractor claim for the loss and expenses through Contractor All Risk (“CAR”) insurance?
It depends on the terms of the concerned CAR insurance. Generally, a CAR insurance policy covers only material damage and third-party liability.
Insurers only cover the insured if the insured suffers “any unforeseen and sudden physical loss or damage”. The insured events are likely events such as earthquakes, volcanism, tsunami, storm, floods and landslides.
Our opinion is that loss and expenses arising from the MCO are unlikely to fall under the coverage of CAR insurance because these expenses are not related to tangible damage to property.
5. What does the IEM form of contract say about EOT arising from COVID-19 MCO?
Clause 20.3(2) of the IEM form deals with the issue of time: “(2) If damage or loss to the Works and their making good have caused delay to the Works beyond the Date for Completion of the Works, the Engineer must take such delay into consideration in determining any extended date for completion which the contractor may be entitled under clause 44 and certify costs incurred which the contractor may be entitled under clause 53”.
Clause 44 of the IEM form lists five events where the contractor may apply for an EOT. The most relevant event would be under clause 44.1(c), i.e. the occurrence of an employer’s risk or a combination of the employer’s risks listed in Clause 20.4, as produced below:
“20.4 Employer’s Risks
1. The following are the Employer’s Risks:
a) war (irrespective if the war is declared or not) or hostilities, invasion and act of foreign enemies;
b) acts of terrorism;
c) riots (other than that caused by the Contractor’s own employees and those of his sub-contractors’), commotion or disorder or civil war;
d) any operation of the forces or nature which an experienced contractor could not have reasonably foreseen or priced for.”
As seen above, clause 20.4(1)(d) may cover the current COVID-19 situation due to its wording “operation of nature which an experienced contractor could not have reasonably foreseen or priced for”. Therefore, it is arguable that situations arising from COVID-19 may fall under the employer’s risk under the IEM form.
6. What are the claims for loss and expense in the IEM form of contract due to COVID-19 MCO?
Clause 20.3(1) of the IEM form provides the contractor with the right to claim for loss and expenses. Clause 20.3 (1) deals with the issue of cost: “(1) If the damage or loss is caused by an Employer’s Risk or a combination of such risks, the Contractor must make good such damage or loss to the extent instructed by the Engineer. The additional costs for the making good of such risks are to be certified by the Engineer under Clause 53”.
Similar to an application for EOT, the claim for loss and expense may be premised on the occurrence of an employer’s risk or a combination of these risks, as listed in Clause 20.4.
Cause 20.4(1)(d) may cover the current COVID-19 situation due to its wording “operation of nature which an experienced contractor could not have reasonably foreseen or priced for”. Therefore, it is arguable that COVID-19 could fall under the employer’s risk under the IEM form.
7. “Epidemic” is not included under the definition of force majeure in Clause 58.2 of the PWD form of contract. Does the current situation fall within the meaning of “natural catastrophe” under Clause 58.2(c) of PWD?
We are of the view that COVID-19 is not a “natural catastrophe”.
However, we believe that contractors may be able to argue that the COVID-19 MCO falls under clause 43.1 (i) of PWD form of contract where the supervising officer may grant the contractor an EOT if the delay in completion is due to “the Contractor’s inability for reason beyond his control and which he could not reasonably have foreseen at the date of closing of tender of this Contract to secure such goods, materials and/or services as are essential to the proper carrying out of the Works.”
8. Can contractors claim for EOT under Clause 23.8(w) of PAM Sub-contract instead of 23.8(a) of PAM Sub-Contract?
We believe that there are three relevant events that a contractor may rely upon when applying for an EOT, namely, Clause 23.8(a), 23.8(p) and 23.8(w). The three events are not mutually exclusive, and the contractor may choose to rely on all three, whenever practicable.
9. When should the start date of the contractor’s notification be, pursuant Clause 23.1(a) PAM Sub-contract? 18.3.2020 (commencement of MCO) or announcement dates of the extensions (25.3.2020 for 1st extension, 10.4.2020 for 2nd extension and 23.4.2020 for 3rd extension)?
Clause 23.1(a) of the PAM Sub-contract states that notice of intention to claim for EOT must be given within 28 days of the architect’s instruction or the commencement of the relevant event. Thus, the start date should be 18.3.2020, i.e. the commencement date of the force majeure event.
10. How to address EOT and loss and expenses claims where the main contractor gave instructions to proceed with some critical works as listed in the waiver given by JKR/DOSH?
Just because you are required to carry on with the work does not mean that you were not affected by the MCO. Notify the main contractor that due to MCO, specific works are affected, such as the progress of work or delivery of items for the critical works. Thereafter, peruse your contract to look out for clauses on EOT or loss and expenses claims. In your application, you would also need to justify how MCO affected your works.
11. Can the employer use the COVID-19 MCO as a reason to delay payment of the contractor’s claim and invoice?
Unless explicitly stated in the contract that events such as the COVID-19 MCO can be a reason to amend the period of honouring certificate of payment, the employers’ obligation to pay is not affected.
12. What should the contractor do if the employer insists that all workers undergo the COVID-19 test at the contractor’s cost?
First, peruse the contract to check if the employer can impose such an obligation. Where the contract is silent, and there is no express obligation, we believe that the contractor is not required to perform the test. The requirement would be a unilateral imposition by the employer outside the contract provision.
13. What does a Sale and Purchase Agreement (“SPA”) between a developer and purchaser say about force majeure clause?
It depends on each agreement. For a developer or a purchaser, there is a standard form that parties have to adhere to under Schedule G and H of the Housing Development (Control And Licensing) Regulations 1989. The standard SPAs provided under both schedules do not have a force majeure clause.
If there are force majeure clauses in SPAs, the wording would usually be as follows: “a party shall not be liable to the other party for any loss, damages or delay whatsoever and howsoever suffered or incurred by the other party due to any government action which are not attributable to the default of the party, or any other cause which is not reasonably foreseeable by the party, the performance of whose obligations is affected by such a government action”.
Therefore, the party seeking to rely on a force majeure clause must first check their respective SPAs as the standard forms do not have such a clause.
14. My construction project is under the purview of the Solid Waste and Public Cleansing Management Act 2007. Can I rely on the Ministry of Works’ FAQ since the Ministry of Housing and Local Government has not issued any FAQ on construction works?
We believe that you may rely on the FAQ issued by the Ministry of Works as the FAQ issued is not confined to works awarded by any particular ministry. We believe the FAQ concerns all construction work, regardless of which ministry it is under the purview of.
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Note: This article does not constitute legal advice to any specific case. The facts and circumstances of each and every case will differ and therefore will require specific legal advice. Feel free to contact us for complimentary legal consultation.