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03/06/21

The impact of the covid-19 pandemic, and the challenges faced by contractors in Malaysia

The impact of the covid-19 pandemic, and the challenges faced by contractors in Malaysia

The COVID-19 pandemic has intruded everyone’s lives, not just regionally, but globally.

Many countries including Malaysia have experienced a seemingly ever-increasing number of virus infections; causing the implementation of national lockdowns and other restrictions on movement and proximity.

Since March 2020, the government of Malaysia implemented a series of measures including, Movement Control Order (“MCO”) [On 16 March 2020, Malaysia Prime Minister announced the movement control order under the Prevention and Control of Infectious Diseases Act 1988 and the Police Act 1967. The MCO effective date was on 18 March 2020 and ended on 3 May 2020], Conditional Movement Control Order (“CMCO”) [CMCO started from 4 May 2020 and ended on 9 June 2020. A relaxation of regulations to prepare for the reopening of the national economy], Enhanced Condition Movement Control Order (“EMCO”) [EMCO or stricter order for 14-days duration would be implemented to specific locations where a large cluster of Covid-19 positive cases was detected] and Recovery Movement Control Order (“RMCO”) [RMCO was started after CMCO ended on 9 June 2020. Subsequently another stage of CMCO 2.0 was announced to take effect on 14 October 2020 due to spike of COVID-19 positive cases in the country] in attempts to curb the spread of the virus.


Author: Kingwah Liew, Driver Trett Country Manager, Malaysia


The Impacts to the Malaysian Construction Industry

Businesses and the economy in general were badly affected by the virus and the measures implemented to try to control it. For example, the crude oil price benchmark, West Texas Intermediate, dropped into negative territory, an historical low around a month after the WHO declared COVID-19 a pandemic. Much like everything else, the construction industry in Malaysia was severely affected by the COVID-19 pandemic. Most construction work, except that classified as critical or essential services, were halted throughout the MCO. Even after the MCO was lifted, contractors have continued to encounter disruption, such as that arising from having to incorporate stringent standard operating procedures on health and safety measures (“SOPs”) for construction sites. Such disruption has prevented them carrying out their works as originally and normally envisaged.


Typical challenges faced by Contractors during the Covid-19 pandemic

CASH FLOW
Cash flow problems were an immediate impact of the COVID-19 pandemic experienced by most contractors.
Project payments are generally evaluated based on the amount of work done. The suspension of almost all construction activity during the MCO meant no work being carried out and thus no payments being made, yet contractors continued to incur their recurring costs, e.g. rental charges, wages, and overheads, etc.


EXPOSURE TO LIQUIDATION DAMAGES & TERMINATION
To regularly and diligently carry out and complete the construction works in accordance with the contract within the specified times is a fundamental contractual obligation for a contractor. When a contractor has failed to complete the works within the prescribed time and in instances where no extension of time has been granted, an Employer or Client normally has the contractual right to impose liquidated damages and sometimes other related charges, or to terminate the contract in the worst-case scenario. Many contractors have successfully claimed for extensions of time for the MCO period under the contract when their projects were suspended with all site activities ceased. However, in many cases we have observed that contractors have, and continue to, struggle to secure further extensions of time for events post MCO.


TYPICAL CHALLENGES FACED BY CONTRACTORS POST MCO
Typical challenges in our experience that contractors have faced when their works were allowed to resume after the initial MCO period include having to implement new health and safety SOPs, shortage of workers, restricted working hours, delay in their supply chains, rework after the long suspension, disruption due to limits on the number of workers by having to comply with social distancing requirements at the workplace, etc. Such delay and disruption
have undoubtably led to reduction in productivity and caused further delay to project completion dates resulting in additional costs being incurred by contractors.

Productivity loss is not always easy to establish and evaluate, and the effects on a construction programme can often be overlooked until much later in time. There are a number of established methodologies for measuring productivity loss, e.g. measured mile analysis, earned value analysis, programme analysis, to name a few. However, in order to run a meaningful analysis, sufficient and accurate contemporaneous records and data are a necessity. In addition, such records are vital for establishing the causation between disrupting events and the resultant productivity losses. 


Malaysia Government initiatives to mitigate the Economic, Social And Industrial Impact of the Covid-19 Pandemic

On 23 October 2020, the Government of Malaysia gazetted an act which will be in effect for two years, titled “Temporary Measures for Reducing the Impact of Coronavirus Diseases 2019 (COVID-19) Act 2020” (“COVID-19 Act”). Section 7 of the COVID-19 Act provides that, between 18 March 2020 and 31 December 2020 (the period was subsequently extended by the Minister for Works to 30 June 2021), if any party whose contract falls under the categories listed below, is unable to perform its contractual obligation due to the measures prescribed, made or taken under the Prevention and Control of Infectious Diseases Act 1988, the aggrieved party or parties to the contract cannot exercise their rights such as imposing liquidated damages under the contract.

LIST OF CATEGORIES OF CONTRACTS

  1. Construction work contracts or construction consultancy contracts and any other contract related to the supply of construction materials, equipment or workers in connection with a construction contract.
  2. Performance bond or equivalent that is granted pursuant to a construction contract or supply contract.
  3. Professional services contract.
  4. Lease or tenancy of non-residential immovable property.
  5. Events contracts for the provision of any venue, accommodation, amenity, transport, entertainment, catering or other goods or services including, for any business meeting, incentive travel, conference, exhibition, sales event, concert, show, wedding, party or other social gathering or sporting event, for the participants, attendees, guests, patrons or spectators of such gathering or event.
  6. Contract by a tourism enterprise as defined under the Tourism Industry Act 1992 [Act 482] and a contract for the promotion of tourism in Malaysia.
  7. Religious pilgrimage-related contract.

However, Section 10 of the COVID-19 Act also provides that Section 7 shall not invalidate any contract terminated, performance bond forfeited, damages received, any legal proceedings, arbitration or mediation commenced, judgment or award granted, and any execution carried out for the period from 18 March 2020 until the publication of the Act, i.e. 23 October 2020.

While the Act has attempted to allow relief for contractors in circumstances where the inability to perform their contractual obligations is through no fault of their own but by events arising from the pandemic, it remains unclear as to the method or amount of relief that contractors will be able to secure.

In view of the above, it therefore seems that if a contractor can prove that it was unable to perform its work due to the observance of the Prevention and Control of Infectious Diseases Act 1988 between 18 March 2020 and 31 March 2021, the Employer or Client may not be able to invoke its contractual rights even if the project has been delayed.

Notwithstanding this, it goes without saying that for a contractor to rely on the COVID-19 Act to avoid having imposed liquidated damages levied against it or being terminated due to project delay, the contractor will have to substantiate with evidence that the delay was due to events related to or to have close proximity to the observance of the Prevention and Control of Infectious Diseases Act 1988. In addition, the contractor will have to demonstrate that the related delay events have impacted their work programme and the contract completion date, despite their best efforts to reduce or mitigate the delays caused by COVID-19 related factors.

CONCLUSION

The Malaysian COVID-19 Act pertains to a wide range of different types of contracts including contracts executed only by a brief letter of award, purchase order, etc., even when such contractual documents contain insufficient provisions to deal with the unprecedented and complex COVID-19 pandemic situation.

Any party who is unable to perform their contractual obligations due to the impact of their observance of the Prevention and Control of Infectious Diseases Act 1988 can now seek relief under the COVID-19 Act. Notwithstanding this, the onus of proof of such claims still lies with the contractor. Good record keeping, e.g. detailed daily, weekly, monthly reports, updated working programme, notices, etc. will play a big role in contractors being able to substantiate such claims.

Ultimately the success or otherwise of a claim is often in proportion to the quality and extent of the contemporaneous records that were kept.


Dated: 25/03/2021 
This article was originally written and released as part of issue 21 of the Driver Trett Digest.
To view the publication, please visit: driver-group.com/digest-issue-21

 

Articles  /  Asia Pacific  /  Digest  /  Global

Articles  /  Asia Pacific  /  Digest  /  Global

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