by Emily Lim and Jessie Yin
A. Section 7 Protection and its Intended Coverage
Since the Government’s first announcement of a nationwide Movement Control Order on 18 March 2020, many businesses, both small and large, have taken a hit from the impact of the unprecedented Covid-19 pandemic. Just as businesses are starting to get back on their feet, the Government have had to re-implement and enhance the movement control restrictions to combat the ongoing pandemic situation with the National Recovery Plan currently in force in Malaysia.
The regulations and measures implemented in battling the pandemic had the unintended, but unescapable, economic consequences, particularly the negative impact on the financial position of most businesses whose operations are significantly affected or forced to come to a standstill. In dealing with the crisis brought forth by Covid-19, the Temporary Measures for Reducing the Impact of Coronavirus Disease 2019 (Covid-19) Act 2020 (“Covid-19 Act”) came into force in Malaysia on 23 October 2020. This highly anticipated legislation entails that parties were no longer limited by the pre-existing laws and contractual terms in seeking the much-needed reliefs.
This article seeks to explore the scope and applicability of Section 7 of the Covid-19 Act in light of the extended applicability of Part II of the Covid-19 Act to 31 December 2021.
B. Applicability of Section 7 Protection
Section 7 reads as follows:-
“The inability of any party or parties to perform any contractual obligation arising from any of the categories of contracts specified in the Schedule to this Part due to the measures prescribed, made or taken under the Prevention and Control of Infectious Diseases Act 1988 to control or prevent the spread of COVID-19 shall not give rise to the other party or parties exercising his or their rights under the contract.”
The Section 7 protection seeks to relieve parties from their inability to carry out their pre- existing contractual obligations due to the Covid-19 lockdown and preventative measures in place. The section essentially creates a legal protection against enforcement of rights under certain contracts against a defaulting contractual party from the period of 18 March 2020 until 31 December 2021.
C. Applicability to Newly-Entered Contracts
Part II of the Covid-19 Act does not restrict its applicability to pre-existing contracts which have been entered into between the parties as at the date of publication of the Covid-19 Act. This means that the Section 7 protection can be relied upon by the contracting parties even if the contracts were entered into recently as long as the requirements under Section 7 has been satisfied.
On one hand, while the aim of the Covid-19 Act is to provide legal protection to defaulters owing to the Covid-19 restriction measures, the authors opine that the extended application of the Section 7 protection to new contracts entered into during this Covid-19 period may potentially go against the notion of freedom of contract because it is for the parties seeking to enter into a new contract during the Covid-19 period to negotiate, allocate risks and accept the terms of their contracts. Therefore, the parties who have willingly entered into the new contract and had agreed to be bound by the terms of their contract ought to hold up to their end of the bargain in the event of any non-performance of the contract.
It remains to be seen how parties will negotiate the terms of the contract in light of the Section 7 protection and how the court will balance the freedom of parties to contract with the protection conferred under Section 7.
D. Factors for Section 7 Protection to Kick In
There are essentially three key elements before a defaulting party may seek to rely on the legal protection conferred under Section 7 of the Covid-19 Act.
Firstly, it is limited to the specific contracts listed under the Schedule to Section 7 the Covid-19 Act. Therefore, it is not a blanket protection for all contract breakers taking a hit from this pandemic situation.
The list itself is not free of ambiguities. For instance, the definition of ‘contract for professional services’ which is listed as one of the specific contracts is widely drafted. The explanatory statement of the Covid-19 Bill is silent on what Parliament intends for this particular category of contract to cover. At the time of writing, there are no reported cases on the meaning of ‘contract for professional services’ under the Covid-19 Act. While it may be safely concluded that a retainer agreement between a law firm and its client would fall within the meaning of ‘contract for professional services, the line is far from clear in the context of a charterparty agreement, consultancy services agreement, software development agreement or even a bodyguard service agreement, to name a few. It remains to be seen what contracts could fall within the ambit of Section 7. A wide and purposive interpretation is likely to be adopted by the courts if there is a strong sentiment for protecting local businesses especially in light of the continuing economic downturn.
Secondly, there must be an inability to perform any contractual obligation(s). This begs the question of the extent or degree of ‘inability’ that is required. Thus far, there are also no reported cases on this. The party that fails to perform bears the burden of proving it has protection accorded by Section 7 of the Covid-19 Act. It is the authors’ view that Section 7 of the COVID-19 Act does not cover instances where there is simply a non- performance of the contractual obligation. For a situation of inability to perform, inference can be drawn to judicial interpretation of the doctrine of frustration, where it requires the intending party to prove impossibility to perform which requires a radical change to what the parties bargained for in the contract. While impossibility to perform in a ‘frustration’ situation seems to connote a higher threshold than ‘inability to perform’ for Section 7 to apply, the burden to prove such inability remains strenuous.
Thirdly, the inability to perform any contractual obligation(s) must be ‘due to’ the measures prescribed, made or taken under the Prevention and Control of Infectious Diseases Act 1988 to control or prevent the spread of Covid-19. A literal construction of the wordings of Section 7 would mean that the defaulting party must establish that the regulations or measures in place at the time of performance has prevented the defaulting party from performing his/her obligation under the contract. In this regard, it may be difficult for parties to avail themselves of the Section 7 protection where the non- performance is attributed to mainly commercial considerations, for example, where a business owner opts to close its outlet throughout the pandemic period to minimize losses due to low traffic but not as a result of any of the measures in place.
However, the words ‘due to’ in Section 7 can be construed widely. Although it may be clear that the inability to perform contractual obligations must be related to the Covid-19 preventative measures, but must the measures be a direct cause of that inability? Does the cause of the inability to perform the obligations have to be material? It is also not clear whether such inability to perform can be solely or partially ‘due to’ the preventative measures.
We examine below the applicability of the Section 7 protection in various commercial scenarios.
E. Scenarios to Illustrate the Applicability of the Section 7 Protection
As stated earlier, as at the time of writing, there is no reported case which has defined the meaning of ‘inability’ in Part II of the Covid-19 Act. Although the courts have yet to determine the degree and extent of ‘inability’ that is needed to be proven in order to invoke the legal protection conferred under Section 7, it is unlikely that the courts would find any extent of ‘inability’, whether or not the ‘inability’ is substantial, to be an inability to perform under Section 7 of the Covid-19 Act. That being said, some of the possible applications of Section 7 of the Covid-19 Act are exemplified in the hypothetical illustrations below:
1. Construction Work Contract
By a letter of award, a company engaged a contractor to carry out and complete the construction of a high-rise building. The agreed completion date under the letter of award was 30 July 2021. However, the lockdown measures implemented has resulted in the construction works to come to a temporary halt.
In the event the construction works can only be completed on 30 October 2021, the company will not be entitled to claim for any liquidated damages for the delay by virtue of Section 7.
In the event the construction works can only be completed on 30 March 2022, the company will not be entitled to claim for liquidated damages for the delay for the period of 30 July 2021 until 31 December 2021. However, the company would be able to claim for liquidated damages from 1 January 2022 until 30 March 2022 provided that the Section 7 protection is not extended beyond 31 December 2021.
The authors nevertheless note that the applicability of Section 7 protection with regards to the delay in completion of construction projects may not be so clear cut from a practical perspective especially when certain construction sectors were in fact permitted to operate at some point when the movement control was relaxed during the different phases of the movement control orders. This may give rise to disputes in the construction sectors in time to come.
2. Lease or Tenancy of Non-Residential Immovable Property
Pursuant to a tenancy agreement, a landlord had agreed to let its premises to the tenant for the purpose of operating a night club for the period of two (2) years commencing on 1 June 2021. Due to the Covid-19 pandemic restrictions, the tenant was not permitted to operate its business at all. The landlord will not able to rely on the tenant’s default in rental payment to terminate the tenancy agreement by virtue of the Section 7 protection.
A company carrying its business in the food and beverage industry sought to terminate its tenancy agreement prematurely amidst the pandemic due to the shortfall in business.
Given that the legal measures and regulations in force permits food and beverage industries to operate throughout the pandemic period, it will be difficult for the company to rely on Section 7 as a legal basis for a unilateral termination.
The landlord of a shopping complex sought to impose penalty charges on its retail tenants for failure to operate the outlet within the stipulated business hours stated in the tenancy agreement. Given that retail outlets at the shopping complex were only permitted to operate for limited hours as per the applicable standard operating procedures prescribed under the regulations in force at that material time, the tenants may rely on Section 7 to argue that the non-compliance of the tenancy agreement was due to the restriction measures in force during the period and therefore the landlord is not entitled to impose any penalty charges.
A retail company has entered into a one-month lease agreement with a shopping complex to lease a space to operate a pop-up store for the main purpose of displaying and selling clothing apparels catered for the Hari Raya festivities. As the restriction measures in place at that time only permitted individuals to move from one place to another for limited reasons such as groceries or medical purpose and retail stores were also not allowed to open, the tenant may rely on Section 7 to argue that it is no longer able to perform the lease agreement to carry out this specific purpose.
3. Event Contract for the Provision of Venue for Sporting Events
An event organizer entered into a contract with the owner of a sports venue to rent the sports venue for the hosting of a sports event scheduled to be held on 1 July 2021.
However, the sports event had to be cancelled and postponed to a further date as a result of the lockdown measures implemented following the Covid-19 pandemic. The owner of the sports venue will be prevented from exercising its rights under the contract to claim for damages for failure to perform against the event organizer due to the cancellation of the sports event by virtue of Section 7.
4. Contract by Tourism Enterprise as defined under the Tourism Industry Act 1992
A company in the business of selling tour buses (“seller”) has entered into a contract with a company providing transportation and tour services (“buyer”) for the supply tour buses. The contract provides that the full purchase price is due to the seller immediately once the buyer issues the notice of collection, and the seller is also entitled to impose late payment charges and storage charges from the date of notice of collection under the said contract.
The seller issued a notice to the buyer that the tour buses are ready for collection on 30 June 2021. Given that the buyer was forced to temporarily cease operation due to the Covid-19 pandemic regulations in place, the buyer had not collected the tour busses nor made the necessary payments.
By virtue of Section 7, the seller will not be entitled to claim for the full purchase price from the buyer or to exercise its other rights and remedies under the supply agreement i.e. to terminate agreement, impose late payment charges and storage charges for the period during which the tourism industry is legally not permitted to operate.
F. Case Highlight: Limited Applicability of the Covid-19 Act
It remains to be seen whether the Covid-19 Act would be beneficial to the business community. At the time of writing, there were no reported cases where Section 7 of the Covid-19 Act has been successfully invoked.
In a recent High Court decision in Malayan Banking Bhd v All Green Agritech Sdn Bhd dan lain-lain  MLJU 723, the High Court found that a defaulting party may only rely on the issue of the Covid-19 pandemic to prohibit an action being brought against it pursuant to Section 7 of the Covid-19 Act if the defaulting party’s inability to perform its contractual obligations occurred during the operation of the Covid-19 Act at that material time i.e. 18 March 2020 until 31 December 2020. Since the defendants’ default in payment of the banking facility in this case occurred in February 2020 i.e. which was outside the applicability period of the Covid-19 Act, the defendants were not allowed to raise the issue of the Covid-19 pandemic as a triable issue to defend a summary judgement application to recover the sums owing under a banking facility agreement.
Albeit no finding was made by the Court on this issue, the authors also note that the Section 7 protection would not be available to the defendant because banking facility agreement do not fall within the list of specific contracts under the Schedule to Section 7 of the Covid-19 Act.
In another case, a recent Sessions Court decision in WPP Business Services Sdn Bhd v Cosmopolitan Avenue Sdn Bhd  MLJU 1042, the Sessions Court found that Section 7 of the Covid-19 Act would not prevent a non-defaulting party from instituting an action against a defaulting party for an agreement not specified in the Schedule of Section 7 of the Covid-19 Act. The Sessions Court took the view that a settlement agreement which was entered into between the parties post the termination of a tenancy agreement does not fall under any of the category specified in the Schedule of Section 7 of the Covid-19 Act and therefore the defaulting party was liable for breach of the terms of the settlement agreement entered into in respect of a tenancy dispute.
In another recent High Court decision in Ang Pi Kui & Anor v Lee Wee Teck & Anor  1 LNS 58, the High Court found that Section 7 of the Covid-19 Act was inapplicable and that the tenancy agreement was validly terminated. The High Court found that the tenancy had already expired on 31 August 2020 as there was no prior notice to renew. It was then followed by a monthly tenancy which was eventually terminated by the landlord’s letter dated 18 September 2020. This was due to the saving provision in Section 10 of the Covid-19 Act which provides that any contract terminated between 18 March 2020 and 23 October 2020 (the publication of the Covid-19 Act) shall be deemed to have been validly terminated.
G. A Comparison of Malaysia’s Covid-19 Act with Singapore’s Covid-19 Act
Singapore has passed the Covid-19 (Temporary Measures) Act 2020 (“Singapore’s Covid-19 Act”) on 7 April 2020 with the aim of providing temporary relief to businesses which are struggling to cope with the impact caused by the Covid-19 pandemic. Similar to Section 7 of the Covid-19 Act, Section 5 of the Singapore’s Covid-19 Act prohibits parties from taking certain actions described in the Act against their counterparties or their guarantors for their inability to perform their contractual obligations under contracts specified in the Act (“scheduled contracts”) that is to be performed on or after 1 February 2020. Section 5 of the Singapore’s Covid-19 Act also specifically provided that “the inability is to a material extent caused by a Covid-19 event and a notification for relief has been served by the counterparties on the other parties to the contract and their guarantor or surety”.
Unlike Malaysia’s Covid-19 Act which does not define the meaning and extent of ‘inability’ that is required to be proven in Part II of the Act, Singapore’s Covid-19 Act, which provides for the legal protection under Section 5 to be invoked if the ‘inability’ to perform contractual obligations under the scheduled contracts is to a material extent caused by a Covid-19 event, is clearer. This implies that only a substantial and significant inability to perform would suffice for a party to rely on Section 5 of the Singapore’s Covid-19 Act for temporary relief.
Further, Singapore’s Covid-19 Act provides a detailed procedure for parties to seek relief under Section 5 of the Act. Pursuant to Section 9 of Singapore’s Covid-19 Act, a party seeking relief under Section 5 must firstly serve a notification for relief that contains the prescribed information on the other parties to the contract, any guarantor or surety for its obligation in the contract and other person as may be prescribed. The other party may thereafter appoint an assessor to make a determination of whether the case is one to which Section 5 applies for the protection under Section 5 to be invoked.
This material is for general information only and is not intended to provide legal advice. If you have any queries regarding the above, please feel free to contact us at email@example.com.
 See https://www.malaysia.gov.my/portal/content/31194 for the list of states in Malaysia by the designated phase under the National Recovery Plan.
 The original applicable period under part II of the Covid-19 Act from 18 March 2020 until 31 December 2020 was first extended until 31 March 2021, subsequently to 30 June 2021 and is currently extended until 31 December 2021 under the Temporary Measures For Reducing The Impact Of Coronavirus Disease 2019 (Covid-19) (Extension Of Operation) (No. 2) Order 2021.
 In contrast, the Companies (Exemption) (No. 2) Order 2020 specifically provides that the 6-months moratorium is only applicable to any notice of demand under paragraph 466(1)(a) of the Companies Act 2016 which is served within the period from 23 April 2020 until 31 December 2020.
 The list of contracts are construction work/consultancy contract, performance bond granted pursuant to a construction/ supply contract, professional services contract, lease or tenancy of non-residential immovable property, event contract, contract by tourism enterprise, and religious pilgrimage-related contract. Two new categories of contracts i.e. hire purchase agreements and credit sales contracts have been included under the Temporary Measures for Reducing the Impact of Coronavirus Disease 2019 (Covid-19) (Amendment of Schedule) Order 2020.
 See reference  above.
 Notwithstanding Section 7, any contract terminated, any deposit or performance bond forfeited, any damages received, any legal proceedings, arbitration or mediation commenced, any judgment or award granted and any execution carried out for the period from 18 March 2020 until the date of publication of this Act shall be deemed to have been validly terminated, forfeited, received, commenced, granted or carried out.