COVID 19 – Force Majeure or Frustration of Contract in Myanmar by Kenny Poon, Lim May Ling and YC Poon
On 11 March 2020, the World Health Organization (WHO) declared the outbreak of COVID-19 as a pandemic.
As a result of COVID-19, many businesses and commercial dealings are expected to or have been interrupted andcontractual parties may experience delays and/or fail to meet their contractual obligations. Such affected parties facepotential liabilities for breach of contract and it is within this article that we explore whether COVID-19 constitutes a force majeure event under a contract which would enable the parties to either suspend their obligations under or terminate the contract.
Generally speaking, the legal system in Myanmar is made up of common law, customary law, and legislation. Where there is no relevant legislation or statute in place, the Myanmar Courts are to apply Myanmar’s general law which is based on justice, equity and good conscience.
In present-day Myanmar, many new laws have been enacted by the Union Parliament (Pyidaungsu Hluttaw) in order to reform its legal system and to encourage foreign and local investment and develop its market economy.
Examples of recent enactments that replace outdated and often archaic laws are the Insolvency Law 2020 (repealed the Yangon Insolvency Act 1909 and the Myanmar Insolvency Act 1920) and the Myanmar Companies Law 2017 (repealed the Myanmar Companies Act 1914).
Myanmar has no specific legislation that govern force majeure clauses. Under common law, force majeure is a creature of contract and it generally means the occurrence of an unforeseeable, external and irresistible event which prevents one or both parties’ from performing their obligations under the contract.
In order to invoke a force majeure clause in Myanmar, there must firstly be such a clause in the contract. If the contract has a force majeure clause, it is a matter of contractual interpretation of the particular clause. A typical boiler-plate force majeure clause can usually be relied upon if:
In the absence of a force majeure clause in a contract, parties may consider relying on Section 56 of the Myanmar Contract Act 1872 (“MCA”) which provides that ‘a contract to do an act which, after the contract is made, becomes impossible, or by reason of some event which the promisor could not prevent, unlawful, becomes void when the act becomes impossible or unlawful’.
Section 56 essentially codified the doctrine of frustration of contract where on the occurrence of some unforeseeable or uncontrollable event which renders the performance of the contract legally or physically impossible, the parties to the agreement are relieved of their obligations under the agreement.
It is important to note that for a contract to be considered frustrated, the threshold is extremely high and not every event which prevents the performance of a contract will result in frustration. The event must be of a nature that is so radically different from the one originally contemplated by the parties and made the contractual obligations physically or commercially incapable of being performed.
Further, it is important to understand the difference between invoking a typical force majeure clause and invoking Section 56 of the MCA. Invoking a force majeure clause will usually only suspend the concerned party’s obligation during the affected period (unless the contract is terminated by the other party by exercising its rights to do so or by automatic termination), whilst the effect of invoking Section 56 of the MCA renders the entire contractto be void.
The options available to a party affected by COVID-19would vary from case-to-case and whether such party is able to obtain relief under a force majeure clause is highly dependent on the construction of the force majeure clause. Some force majeure clauses may allow for automatic termination of the contract if the force majeure event persists over a specified period whilst others may require a notice of termination to be given. Some force majeure clauses may even provide that failure to give notice of a force majeure event within a specified period from the occurrence of the force majeure event will lead to the affected party not being able to rely on the force majeure event to discharge or delay its contractual obligations.
Depending on the wording of the force majeure clause, the effects could range from a suspension or delay of the contract to the termination of the contract. To conclusively determine the steps to be taken by the affected party and the effects of invoking such clause, the underlying clause will have to be read and analysed carefully.
Parties to commercial contracts that are unable to perform their contractual obligations due to the COVID-19 outbreak may first notify the other party and seek to renegotiate the terms of contracts. To assess the impact of the COVID-19 outbreak on contractual arrangements, parties should consider the following approaches:
The contents of this memorandum are not intended to be comprehensive on the above subject but rather a general practical guide. Information obtained from this memorandum should not be relied upon without first obtaining legal or professional advice from us.