Construction contracts: no relief against government under section 7 of Covid-19 Act

Our Foo Joon Liang and Benjamin Kho explore whether Section 7 of the Covid 19 Act shields construction industry players in their contractual dealings with the government amid the covid-19 pandemic.


The Covid-19 Act(1) continues to raise riveting legal issues in the Malaysian courts. In SN Akmida Holdings Sdn Bhd v Kerajaan Malaysia,(2) a Malaysian high court was tasked to decide whether the relief of contractual obligations under section 7 of the Covid-19 Act applies to construction contracts to which the government is a party.

Background

Section 7 of the Covid-19 Act has been in the limelight since the Act came into force. In brief, it prohibits non-defaulting parties from exercising their contractual rights against a defaulting party, whose inability to perform was due to the measures taken under the Prevention and Control of Infectious Diseases Act 1988 (PCID Act), such as the various movement control orders (MCOs) announced by the government. Notwithstanding this, the relief is only available to certain categories of contracts which are set out in the Schedule to Part II of the Covid-19 Act (the Schedule) – namely:

  1. Construction work contract or construction consultancy contract and any other contract related to the supply of construction material, 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.

In light of the above, various contractual rights under construction contracts are not available to contracting parties – for example, suspensions of works, terminations of contracts and calling on performance bonds during the moratorium period. The temporary relief expired on 31 December 2021 but is now extended to 22 October 2022. Thereafter, the non-defaulting party will be entitled to exercise its contractual rights again.

Facts

The SN Akmida case is a typical construction dispute concerning a call on a performance bond. SN Akmida Sdn Bhd (the plaintiff) brought a suit against the government of Malaysia (the government). The plaintiff was appointed by the government to carry out the construction of a hospital in Bera, Pahang. The government terminated the plaintiff’s employment due to non-completion of works by the extended completion date, and subsequently called on the plaintiff’s performance bond.

Dissatisfied, the plaintiff challenged the call on the bond and contended that the government was not allowed to do so by virtue of section 7 of the Covid-19 Act, as the demand had been made after the Covid-19 Act (specifically section 7 thereof) came into force.

Decision

The court observed that there was no express provision under section 7 of the Covid-19 Act that is applicable to construction contracts entered into with the government. Such an absence is in stark contrast to other statutes – for instance, the Construction Industry Payment & Adjudication Act 2012 and the Arbitration Act 2005, which expressly stipulate that the government is bound by the legislations.

Without such an express provision, the court considered whether the protection under section 7 of the Covid-19 Act could apply to government construction contracts by necessary implication. Adopting a literal rule of statutory interpretation, statutes are to be interpreted in their ordinary and plain meaning. The court found that the words used in the Schedule to the Covid-19 Act were clear and unambiguous – that is, construction contracts entered into with the government are not included. Although the contrary interpretation will be beneficial to the public, the court was not convinced that the Schedule was to be interpreted to encompass such construction contracts.

Even if government construction contracts were covered by necessary implication, the court held that the plaintiff had still failed to fulfil the requirements of section 7. The court further ruled that the defaulting party could not invoke the provision simply because there was a pandemic in the country and that there were MCOs in force to curb the spread of the disease. The applicability of protection under section 7 of the Covid-19 Act turns upon, among other things, whether the nexus between the inability to perform and the measures under the PCID Act is shown, which the plaintiff failed to prove. The plaintiff’s challenge on the call on performance bond was thus dismissed.

Comment

This appears to be the first reported case where a party is seeking protection under section 7 of the Covid-19 Act and the government is a party to a construction contract. Each year, the federal government and the state governments enter into contracts with numerous contractors for the construction of roads, schools and other public infrastructure. Unlike their counterparts, who deal with private companies, these contractors are deprived of the same protection. The court’s decision seems to put government construction contracts on a completely different plane to other construction contracts. Local authorities are, however, not treated the same as the government in the eyes of law and thus, the section 7 protection ought to apply against them.

The plaintiff has since filed an appeal against the court’s decision. It would be interesting to observe whether the appellate courts will hold the same view as the previous court. The outcome would determine whether section 7 of the Covid-19 Act will serve as an armour for construction industry players in their future contractual dealings with the government amid the covid-19 pandemic.

For further information on this topic please contact Benjamin Kho Jia Yuan or Foo Joon Liang at Gan Partnership by telephone (+603 7931 7060) or email (jiayuan@ganlaw.my or joonliang@ganlaw.my). The Gan Partnership website can be accessed at www.ganlaw.my.

Endnotes

(1) Temporary Measures for Reducing the Impact of Coronavirus Disease 2019 (COVID-19) Act 2020.

(2) [2022] 2 CLJ 302; [2021] MLJU 2449.

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