The outbreak of the novel coronavirus (“COVID 19”), was declared a pandemic on 11 March 2020 by the World Health Organization (“WHO”). Given the disruption caused by the COVID 19 pandemic, it is likely that performances under many contracts will be delayed, interrupted, or even cancelled. Counterparties (especially suppliers/contractors/developers) to such contracts may seek to delay and/or avoid performance (or non-performance liability) of their contractual obligations and/or terminate contracts.
In such challenging times, enforcing a ‘force majeure’ clause may be the only option available to the affected party. Businesses affected by COVID 19 may avoid obligations without being in breach of contract under existing contracts through recourse to statutory provisions or force majeure provisions in the contract itself. Under a contract agreed upon between the parties, the occurrence of a force majeure event protects a party from liability for its failure to perform a contractual obligation.
In most contracts, the affected party wishing to enforce a force majeure clause must send a notice to the other party within a specified number of days from the occurrence of the event. Depending on the nature of the case, the contract may be terminated or an extension of time will be granted to perform the contract upon the force majeure event coming to an end. While the language of a force majeure clause may differ from one contract to another, a pandemic like COVID 19 may fall within the category of ‘act of God’ or ‘other circumstance which hinders the performance of the contract’ through the application of the interpretive rule of ejusdem generis. The rule states that when a list of specific items belonging to the same class is followed by general words, the general words are to be treated as confined to other items of the same class for the sake of contractual interpretation.
The remedies for enforcing a force majeure clause will usually depend on the contractual arrangement between the parties. The contract may specify termination of the contract or deferral of performance of the contract until the end of the force majeure event or waive a specific obligation owed to one of the parties.
This common law concept of force majeure is governed under Section 56 of the Myanmar Contract Act, 1872 (“MCA”). Section 56 of the MCA, which adopts the English ‘doctrine of frustration’ provides that a contract requiring an act to be performed, which after the contract is made, becomes impossible, or, because of some event which the promisor could not prevent, unlawful, becomes void when the act becomes impossible or unlawful. The doctrine of frustration would thus apply to those contracts which were entered into before the outbreak of COVID 19 and subsequently, performance under the contract became impossible. Performance is considered to become impossible when a change of circumstance upsets the very foundation upon which the parties entered into their agreement where the promisor finds it impossible to perform the act which it had promised to do. It is a principle of law, however, that unprofitability, or mere difficulties or rise in prices would not be considered an impossibility.
In the absence of a force majeure clause in a contract, Section 56 of the MCA is the alternative legal protection afforded to parties that cannot perform the obligations under a contract due to an uncontrollable/unforeseeable event which makes it impossible for the affected party to perform a given act.
Force majeure clauses in contracts and the stipulations under the contract may differ from case to case. There may be force majeure clauses, where upon continuation of the force majeure event beyond a certain number of days [60 days or 90 days as specified] would automatically lead to a termination of the contract. There may also be force majeure clauses which require parties to submit a notice for termination upon the continuation of the force majeure event beyond a certain number of days [60 days or 90 days as specified] and upon the notice requirements being met, there would be a deemed termination of the contract.
There may also be a situation that the parties do not give notice for termination and the force majeure event has come to a halt. In such an event, the parties may amicably rescind the contract or may decide on revised performance under the contract.
Depending on the loss payment mechanism under the contract for each of the situations mentioned above, upon termination, the affected party may have to be compensated in line with the payment terms under contract (under Section 74 of the MCA- liquidated damages), or un-liquidated damages may have to be paid (under Section 73 of the MCA) as determined by a Myanmar court. The general principle for assessment of damages is compensatory, i.e. the innocent party is to be placed, so far as money can provide, in the same position as if the contract had been performed and consequential damages paid.
Additionally, Section 12 of the Specific Relief Act (“SRA”) also provides relief to an affected party to enforce specific performance (in circumstances where un-liquidated damages is an inadequate remedy):
- when there exists no standard for ascertaining the actual damage caused by non-performance of the act agreed to be performed;
- when the act agreed to be performed is such that monetary compensation for its non-performance would not afford adequate relief; or
- when it is probable that monetary compensation cannot be obtained for the non-performance of the act agreed to be performed.
However, the enforcement of specific performance depends on the extent to which performance of the contract is feasible upon the force majeure event coming to a halt.
Section 13 of the SRA is in itself an exception to Section 56 of the MCA in so far as it mentions that a “contract is not wholly impossible of performance because a portion of its subject-matter, existing at its date, has ceased to exist at the time of the performance”. The SRA thus empowers the Court to direct a party to specifically perform so much of the part of the contract as the party can perform in order to mitigate losses of the affected party. As far as the remaining portion of the contract is concerned, the court may grant un-liquidated damages under Section 73 of the MCA.
Therefore, while force majeure clauses and the enforcement of Section 56 protects parties from performance under contract, upon the force majeure even subsiding, the courts may direct the parties to perform their respective obligations under the contract and/or compensate for losses suffered by the affected party (liquidated or un-liquidated).
The information provided here is for information purposes only, and is not intended to constitute legal advice. Legal advice should be obtained from qualified legal counsel for all specific situations.
Contact
Partner & Managing Director, DFDL Myanmar/Singapore
Authors
Partner, Deputy Managing Director & Head of Banking and Finance Practice, DFDL Myanmar
Legal Adviser, DFDL Myanmar
