What is the impact of COVID-19 on Malaysia’s construction industry & what can be done?

The government should enact a COVID-19 Moratorium & Relief Act to provide some respite to the construction industry’s affected parties. HBA has proposed the following provisions on reprieve for ‘Inability to perform Construction Contract’ and ‘Construction Related Contract’.

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Recently, Datuk Chang Kim Loong has offered an objective overall emphasis on the need for a ‘Legal Shield’ for contracts’ in various online media. The current COVID-19 pandemic which had resulted in a Movement Control Order (MCO) in Malaysia, calls for the need of a specific law to be enacted to provide a ‘legal shield’. This should offer legislative protection to contractors, from legal consequences arising from failures or inabilities to perform their contractual obligations / scheduled performance during this period.

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The need for such legislation is to resuscitate the economy, which has now been ravaged by the pandemic, causing unprecedented and unforeseeable economic and social impact. Disruption of supply chains (e.g. food, products and services), manpower shortages, the closing of offices, factories and suspension of construction works on sites are among the serious consequences. Most of these cases have culminated in the hardship for individuals and business entities to fulfil contractual obligations.

What is the impact of Covid-19 on the construction industry?

One such area is likely to be the hardest hit is the construction industry. According to a statistic reported in the media on the topic ‘Construction industry’s dilemma – Covid-19, the impact of the MCO would be immense to contractors.

The construction industry has suffered a decline of 60% during the 2016-2018 period, the industry’s annual turnover has been declining from a peak of RM273 billion in 2016 to RM106 billion in 2018. – Param Sivalingam, Former Project Director, MRT Serdang-Sungai Buloh Line –

According to his report, it would be more severe as only contractors registered as G1-G4 with CIDB (Construction Industry Development Board) are allowed to resume works on-site, whereas contractors from G5-G7 are precluded from this exemption.

As a result, a total of 17,000 companies would be affected, and these companies are the key drivers of the construction industry. They represent a majority of the personnel and labour workforce amounting to a total of 850,000 workers in the construction industry, based on 2018 statistics from CIDB. Post-MCO, it’s likely that some of the foreign workers may decide to return to their home country out of fear and uncertainties. Since then, eventhough all classes of contractors are allowed to resume construction work at site subject to approval, but by then the damage is done.

Amidst the need to comply with the onerous health and safety requirements, fear and anxiety of infection, elements of uncertainty and the reduction of foreign workers; the morale of the workers would have taken a heavy hit and their productivity disrupted in the process.

Furthermore, there is a risk that the supply chain disruption may not be re-established in the short term – such as the suppliers of key building materials, equipment rentals and imported items. These statistics and predicaments alone would suggest the construction industry would indeed need more than a helping hand from the government.

MORE: Enact a COVID “moratorium” law to help consumers & businesses cope during MCO

How will homebuyers and developers be affected?

When contractors fail to deliver in time, it could undermine the property developers’ ability to deliver to their purchasers at the scheduled hand over date – especially for housing projects, which accounts for a substantial portion of the construction industry.

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That will, in turn, trigger a chain reaction across the entire housing supply chain with the purchasers claiming Liquidated Ascertained Damages (LAD) from the developers, who in turn would attempt to recover their losses from the contractors, who would then abandon the project when they are unable to pay. The developers would then be unable to pay the consultants, suppliers, creditors and even the bank loans and facilities, which will, in turn, create another chain of confrontational litigations.

Soon, the entire industry would be mired in a vicious cycle of litigations. A spike in the number of problematic projects, winding up of development companies, purchasers made bankrupt due to failure to service housing loans and eventually even the banks will experience the credit crunch. In the end, all parties will lose out. Not forgetting, there are also commercial construction projects at stake.

READ: Extension of Time (EOT) can no longer be granted to developers, good news for homebuyers

How are existing building contracts affecting the delays caused by the COVID-19 outbreak?

Force Majeure is a common clause devised in most construction contracts to protect both the contracting parties from liabilities. This would come into effect when a certain party is prevented from performing its contractual obligation due to unforeseen events beyond the control of both parties in events such as wars, riots, strikes, civil commotions, natural disasters, epidemics, riots, strikes, government intervention and so on.

Let us take a look at how the 3 most established standard forms of ‘contract for construction works’ in Malaysia would deal with delays caused by the outbreak.

  1. JKR 203A (2007/2010) Contract is a standard form of contract for government and public sector projects, which covers all building and engineering works;
  2. PAM Contract (2006/2018) is a standard form for the private sector and traditional general contracts, which covers building works only;
  3. FIDIC (1999) is a standard form of contract, used mainly for civil engineering works.
PAM (2006/2018) JKR 203A (2007/ 2010) FIDIC (1999)
1) Clause 23.0 Extension of Time

Clause 23.0 ‘The following are the Relevant Event referred to in Clause 23.0: 23.8(a) Force Majeure;

 Article 7(ad) ‘ Force Majeure means any circumstances beyond the control of the controller caused by the terrorist acts, governmental or regulatory action, epidemics and natural disasters. 

1) Clause 43.0 Delay and Extension of Time 

Clause 43.1(a) ‘force Majeure as provided under Clause 57’

Clause 43.1(i) ‘the contractor’s inability for reason beyond his control and which he could not reasonably 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.’

1) Clause 8.4 Extension of  Time for Completion
Clause 8.4(d)
Unforeseen shortages in the availability of personal or Goods caused by an epidemic or governmental actions.’

2) Clause 23.0 Extension of Time

 Clause 23.8 (w) ‘suspension of the whole or part of the Works by order of an Appropriate Authority provided the same is not due to any negligence, omission, default and/or breach of contract by the Contractor and/or Nominated Sub-Contractor.

 

 2) Clause 57.0 Effect of  Force Majeure (* Clause 58 in JKR 203A (2010)

Clause 57.2 ‘An ” Event of Force Majeure” is an event beyond the control of both parties which are:

(a) …

(c) natural catastrophe including but not limited to earthquakes, floods, subterranean spontaneous combustion or any operation of the force of nature against which ……..’

2) Clause 19. Force Majeure
Clause 19.1

‘In this clause, “Force Majeure” means an exceptional event or circumstances:

(a) which is beyond a party’s control

(b) which such party could not reasonably have provided against before entering into the contract

(c) which had arisen, such party could not reasonably have avoided or overcome, and) which is not substantially attributable to the other party. …….

What about contracts without a Force Majeure’ clause?

Unfortunately, not all the construction-related contracts carry a ‘force majeure’ clause. Contracts for minor works, renovation/ refurbishment, interior works and the statutory Sales & Purchase Agreement regulated under the Housing Development (Control & Licensing) Regulations, 1989 – are examples of those that do not carry one.

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In the absence of a ‘force majeure’ provision within our scheduled housing agreements, a host of contentious legal issues will arise as enumerated by Datuk Chang’s write-up. Since construction works are not within the ‘essential services’ category, it is understandable the developers will also suffer financial hardship. 

Hence, those operating under contract without a ‘force majeure’ clause ought to be accorded the same protection as the aforementioned forms of contract, to tide them over during this uncertain and difficult period, as per our recommendation below:

We would recommend a form of mandatory ‘force majeure’ relief (temporary), which applies to situations where a party’s ability to perform their contractual obligations is hampered due to the MCO ruling. Safeguards for the developer and purchaser can range from the duration of relief to prohibition from penalisation (termination/determination/forfeiture/levy of penalties, etc), due to breach of obligations under a contract or failure to perform and/or entitlement.

Alternatively, a ‘reprieve’ clause could be introduced. It has the exact legal impact as ‘force majeure’ clause save that it is called a ‘reprieve’ clause to remind all that it is a one-time measure which seeks to provide temporary respite/relief during such a highly unprecedented occasion. 

The introduction of such a clause would enable two things:

1) The parties relying on it to get a temporary respite, allowing them to focus on regaining their footing without the interference of contractual/legal entanglement.

2) Reduce the pressure on the government to lift the MCO – currently, we’re at an average of 100+ infection cases per day with an increasing number of Emergency Movement Control (EMC) lockdowns.  

We would further recommend that such ‘reprieve’ clause be given a blanket coverage for all contracts related to construction, so as to also enable those relying on ‘Force Majeure’ clause to utilise it as an alternative, in event that their application under the building contract is denied due to technical reasons and other non-substantive grounds.

After all, the purpose of the legislation is to facilitate the construction industry with the much needed ‘breathing room’, to ease the industry into an expeditious recovery.

FIND OUT: What is the impact of COVID-19 on Malaysia’s property market?

What are our proposed COVID-19 Moratorium And Relief Bills to the government?

The proposal to enact a new legislation has reached our Prime Minister, Muhyiddin bin Haji Muhammad Yassin and his Cabinet whereupon a paper has been prepared for deliberation. Once approved in principle, the Attorney General’s Office (AGC) will be instructed to write the law.  

The illustration below will demonstrate how a ‘reprieve’ clause would be operated for 2 different scenarios. Illustration 1 is one where the scheduled Vacant Possession (VP) is due during the MCO period whilst Illustration 2 is where the scheduled VP is due post-MCO.

Proposed reprieve for inability to perform construction contracts & construction-relatedv contracts

  • Where construction works had commenced on site when MCO was implemented.
  • For example Developer A will require another 2 months of work to deliver VP but is unable to, due to the MCO.
  • Therefore, Developer A will be given a reprieve of 2 months and a mobilisation period of a minimum of 7 days and not exceeding 14 days since all construction activities are completely halted.
  • This mobilisation period is to help the contractors to kick start the work by mobilising their manpower and resources and using this transition period to get back on track.  
  • Developer A to be granted a reprieve of 2 months and 7 days to be calculated from the date on which MCO ends. 

Where construction works had commenced on site when MCO was implemented.

  • For example: Developer B will require another 4 months of work to deliver VP when MCO was implemented. However, MCO was lifted 3 months later.
  • Therefore, Developer B will be given a reprieve of 3 months and a mobilisation period of a minimum of 7 days and not exceeding 14 days since all construction activities are completely halted.
  • This mobilisation period is to help the contractors to kick start the work by mobilising their manpower and resources and using this transition period to get back on track.  
  • Developer B to be granted a reprieve of 4 months and 7 days to be calculated from the date on which MCO was lifted. Therefore, the new VP date shall be 25th October 2020.

*This article was written by Ar. Ng Yean Shiunn, technical advisor of the National House Buyers Association (HBA) a non-governmental and not-for-profit Organisation manned wholly by volunteers.

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