In the recent High Court case of SN Akmida Holdings Sdn
Bhd v MTD Construction Sdn Bhd (and Another Originating
Summons) [2021] 1 AMR 479, the plaintiff sought to rely
on the Prevention and Control of Infectious Diseases
(Measures Within Infected Local Areas) Regulations
2020 ('Regulations') as an event
of force majeure to oppose the defendant's
calls on the two bank guarantees on grounds of
"unconscionability". Although the case turned on several
legal issues, our commentary will focus solely on the novel point
of one party's reliance of the Covid-19 Regulations as an event
of force majeure in restraining calls on bank
guarantees.
Brief facts and findings of the High Court
The plaintiff appointed the defendant as the project's
nominated sub-contractor for the construction of two Mass Rapid
Transit stations. The plaintiff then provided a performance bond
and procured an advance payment guarantee in favour of the
defendant, as required by the sub-contract.
The defendant subsequently terminated the sub-contract allegedly
breached by the plaintiff and demanded payment under both the
performance bond and the advance payment guarantee
('the bank guarantees'). The plaintiff
filed two applications to restrain the defendant's call on the
bank guarantees pending arbitration of the dispute. One of the
plaintiff's contentions was that the defendant's call on
the bank guarantees were unconscionable due to an event
of force majeure i.e. the enforcement of the
Regulations. The plaintiff contended that (i) the enforcement of
the Regulations resulted in the plaintiff's inability to carry
out the works; and (ii) it was unconscionable for the
defendant's two calls to be made in view of the enforcement of
the Regulations and its three extensions thereafter.
The learned Judge, relying on the Federal Court's decision
in Sumatec Engineering and Construction Sdn Bhd v
Malaysian Refining Company Sdn Bhd [2012] 4 MLJ 1, held
that a party ('X') must satisfy two
tests to show that the call on a bank guarantee by its
beneficiary ('Y') is unconscionable,
namely that:
i. X has a "seriously arguable case that the only realistic inference" is Y's call is unconscionable, or has adduced a "strong prima facie" case that Y's call is unconscionable; and
ii. X must satisfy the court that the "events or conduct are of such degree such as to prick the conscience of a reasonable and sensible" person.
The High Court, applying the tests laid down in Sumatec Engineering, was satisfied that the defendant's calls on the bank guarantees were not unconscionable and dismissed the plaintiff's applications. The Court held, inter alia, that:
i. The plaintiff has "no seriously arguable case that the only realistic inference" is that the defendant's calls on the guarantees were unconscionable;
ii. There is no "strong prima facie case" that the defendant's two calls were unconscionable; and
iii. The events in relation to the termination of the sub-contract and the calls by the defendant were not of such a degree that "prick the conscience of a reasonable and sensible person".
In arriving at its finding that the calls were not unconscionable, the High Court had to consider inter alia the plaintiff's reliance on the enforcement of the Regulations as a force majeure event, within the sub-contract provisions. The High Court rejected the plaintiff's contentions on the following grounds inter alia:
i. The plaintiff's delay in the works occurred way before the enforcement of the Regulations;
ii. The enforcement of the Regulations does not constitute an event of force majeure within the definition of "Event of Force Majeure" under of clauses 41(a)(i) to (vi) of the sub-contract; and
iii. Even if it is assumed that the enforcement of the Regulations is a force majeure event pursuant to Clause 41(a) of the sub-contract, clause 41(d) stipulates that the 'event of force majeure' will not affect the rights and liabilities of the plaintiff and defendant which accrued before the enforcement of the Regulations on 18 March 2020.
Comments
This is the first reported case where a party attempts to rely on
the enforcement of the Regulations as an 'event
of force majeure' within contractual
provisions.
On the facts, it is observed that Clause 41(a) in the sub-contract
does not include Acts of Government or 'outbreak of pandemic,
epidemic and/or endemic' as 'force majeure'
events. Hence, it remains to be seen if the enforcement of the
Regulations will be considered as an event of force
majeure if any of the aforesaid events are incorporated
as 'force majeure' events in the contract between
parties.
Henceforth, contracting parties should consider revisiting and
revising the force majeure clauses in their
contracts to include all circumstances within their contemplation
as a proactive step in risk management.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
