COVID 19 – Force Majeure or Frustration of Contract in Myanmar

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.

1. What is the legal system in Myanmar?

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Examples of recent enactments that replace outdated and often archaic laws are the Insolvency Law 2020 (repealed the Yangon Insolvency Act 1909 and the Myanmar Insolvency Act 1920) and the Myanmar Companies Law 2017 (repealed the Myanmar Companies Act 1914).

2. What is a force majeure event and are there any specific legislation governing force majeure clauses in Myanmar? If so, what are the specific provisions?

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.

3. How to invoke a force majeure clause?

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:

(i) one of the events mentioned in the force majeure clause has occurred and words such as ‘disease’, ‘epidemic’ or ‘pandemic’ should be sufficient to cover the COVID-19 outbreak;

(ii) one or both parties are prevented or hindered from fulfilling their obligation under the contract;

(iii) the event is beyond the control of the party(ies); and

(iv) no reasonable steps could be taken to prevent or mitigate the event.

4. What happens if there is no force majeure clause in the contract?

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.

5. What can a party affected by COVID-19 do?

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.

6. Examples of force majeure cases in Myanmar

i) In The State Agricultural Marketing Board (plaintiffs) v Aung Trading Co. (defendants) 1966, the plaintiffs sued the defendants for failure to deliver 200 bales of gunnies from Rangoon to Akyab. The defendants argued that it was an act of God or vis major as the ship transporting the gunnies sank due to bad weather, thus absolving them of their liabilities. The Court ruled in favour of plaintiffs and held that an act of God or force majeure is available only when it is impossible to provide against the occurrence and it is not enough to show that it was not reasonably possible to provide against it. As the inclement weather conditions on the west coast of Arakan were not unexpected during monsoon season, it cannot be said that the event is so unexpected that no human foresight could reasonably anticipate it.

ii) In Rangoon Commercial House (appellant) v Shahjehan Musktikhan Trading Corporation (respondent) 1955, the appellant entered into a contract with the respondent to buy 30,000 yards of certain kind of cloth manufactured in Japan. Upon the failure to deliver the goods, the appellant filed a suit for breach of contract against the respondent. One of the defence raised by the respondent was force majeure as stipulated in clause 9 of the contract and it argued that the failure of their principals in Japan to deliver the goods to Burma amounted to a force majeure event and that this exempted them for non-delivery. The Court scrutinized the wordings in the force majeure clause and held that there is no evidence produced to prove that the non-delivery was in fact due to the causes set out in clause 9 which in any way interfered with the manufacture or shipment of the goods. Thus, this case goes to show that in order to raise force majeure as a defence, one must ensure that the intervening event falls within the scope of the force majeure clause to trigger the remedy provided in the force majeure clause itself.

7. What are the recommended steps to deal with thedifficulties of fulfilling commercial contracts as a result of COVID-19?

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:

i) review existing material agreements to identify the key impacted provisions including identifying whether there is any force majeure clause in the agreements which may temporarily suspend, absolve and/or terminate the parties’ obligations under the agreements;

ii) perform its contractual duty to notify the counterparty of the occurrence of such force majeure event within the stipulated time frame;

iii) engage in proactive mitigation measures; and

iv) obtain legal advice on the assessment and analysis ofits rights and obligations.

Disclaimer:

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.