What are the legal consequences of the virulent ‘lockdown’?
Millions of employees cannot go to work. Should they not be paid? Why should employers pay unproductive employees? What about bank loans? And international contracts? Do we need legal amnesties? Is there a way out of this?
No historical comparison
Since the Second World War, this is the first time in history that any nation, including ours, has faced a disaster so vast.min
The May 13 of 1969, was not a nationwide disaster that the coronavirus pandemic is.
ministerI remember skipping school, not having much to eat but tapioca every day, and some vegetables from the garden: that situation differs from the current national disarray.
Make no mistake – we are at War
Like all wars, this is a fatal one.
In wars created by humans, there are rest periods during which one can recover, escape or hide.
A war with microbes has no respite. The virus will find you by human communication, and will not stop until it is destroyed or deactivated.
. Why should employees not be paid, or fear dismissal?
It is the humans who drive the economy – how are we to treat them?
Millions of employees cannot go to work.
Should they not be paid?
Do they not have families to support?
It is not their fault that they are stuck amidst a viral pandemic.
. What about Employers?
Why should employers pay unproductive employees?
If an employer – or indeed an employee – has not been paid, how are each to repay bank loans for businesses, homes or vehicles?
. Is there a way out of this?
How could the Government assist the man on the street?
If it gives out money, who will repay the Government.
The Government’s money must come from somewhere!
One cannot de-couple the national economy from the human beings who drive it. They are engaged in different commercial activities.
As a rough guide, let us look at the labour market, some general legal concepts, international contracts, force majeure, and the several remedies the Government can help with.
. The State of our Labour Market
By the end of 2017, Malaysia had just over 9.6 million documented employees.
By the end of 2019, the labour force had increased to more than 10.5 million workers.
Over 68% or 7.16 million of these were men.
Just under 33% or 3.3 million were women.
To that add more than 2.0 million documented foreign workers: and perhaps about a maximum of 5.0 million undocumented foreign labour.
Imagine 17.5 million people sitting down doing nothing while having to feed their families.
. Average salary per employee across the whole nation
The average Malaysian employee earned, in 2017, RM2,852.00.
Assuming an annual growth in salary at the rate of 3.9%, the current average salary per employee would hover at about RM2,963.00.
. What is the point of all these numbers?
The answer is, if the lockdown lasts two weeks, the employees would lose a minimum of RM15.52 billion (USD 3.47 billion).
In these 14 days, despite having no production from their employees; employers must now cough up RM15.52 billion.
. Look at it from the point of the employee
The most important element in any organisation is its people.
That he cannot now work is no fault of his.
He has a family to support, and usually, there is a mortgage for a house and a motor vehicle.
Usually, some level of training is required for an employee to fit into any particular job.
If the employer wishes to fire his current employees; and re-hire new employees, they would lose many men-hours retraining them.
. Can an employer terminate his employee for staying away from work for two weeks?
That is the real question the employers are asking.
The answer is, it depends.
Most employment contracts would not have a clause that deals with an emergency such as the communal virus pandemic. No one would have thought about it. In that case, one is to fall back onto the general law.
. Lawyers call this the law of Frustration
It is something that neither the employer nor the employee would have thought about at the time both parties entered into the contract of employment.2See section 57 of the Contracts Act 1950; and also sections 15 to 18 of the Civil Law Act 1956
Without getting too technical, the heart of the law of Frustration is this: if a ‘frustrating event’ occurs – a war, an earthquake, etc – both parties are released from performing their contractual obligations.
. For Frustration to work, three factors need to be present:
(1) Some ‘Supervening Event’ must occur.
(2). The Event must be something that both parties had not thought about – at the time they entered into the contract: called ‘unforeseeability’.
(3) The effect of the Supervening Event must be to ‘completely change the foundation of the contract.’
. What if it is physically impossible to perform the contract?
In one case, a man wished to hire a musical hall.
He entered into a contract of hire.
The hall burnt down shortly after that.
The court ruled that the contract had been ‘frustrated’.
Whatever monies the hirer paid were to be repaid.3Taylor v. Caldwell (1863) 3B & S 826
. Sometimes the contract may become illegal
Suppose you wished to hire foreign nationals from Country B.
Both Governments give you their approval. You bring in 1,000 workers from Country B into Malaysia.
You sign a contract with each of those workers.
One day Malaysia passes a law. It says all Country B’s nationals cannot work here: Malaysia considers Country B an Enemy State.
None of the workers from Country B can sue you. It is not your fault that the Government changed its law to say that any relationship with a nationality of B Country is illegal.
Does the coronavirus virus pandemic make it impossible for the employee to perform the contract?
The answer is, Yes – but only as long as the Movement Control Order is active.
If we apply this test to the current pandemic, what is the result?
Because the coronavirus is world-embracing, and fatal in its effect, it qualifies as a ‘supervening’ event.
Second, unless there is a ‘pandemic’ clause in the agreement, no one could have foreseen this.
However, the real issue would be:
. ‘Did the supervening event completely change the character of the agreement’?
In employment cases, this test is difficult to prove.
The Covid-19 pandemic does not change the kind of work of, e.g., a clerk does – it only makes it temporarily impossible.
However, if the contract is for the supply of 10,000 men to one of our local ports, then the delivery of the labour force would expose the men to illness and death.
It would subject the Recipient to infection and lockdown.
The situation for both becomes really serious.
Now, suppose the labour supply is time-sensitive.
The men need to be sent to the port within three days of the Recipient’s request.
Then not only is the contract physically impossible, but the Supplier is confronted with additional expenses – and the risk to the lives of his labour force.
The Recipient faces the risk of infection of his own staff.
The pandemic completely changes the foundation of the contract.
. Can the employer terminate the employee?
The answer depends on how long the ‘lockdown’ lasts.
Can a forced absence of two weeks be something that ‘completely’ changes the ‘foundation of the contract’?
Suppose an employee is a machine operator – even though he is willing to do it, he is forbidden to go to work.4Letter of the National Security Council dated 18 March 2020
Come April 01, the national law may allow him to continue his duties.
So also a clerk, or a carpenter, or indeed, a bank manager.
A mere two weeks’ absence may, therefore, not allow an employer to terminate his employment.
. The lockdown is not permanent
Here, frustration does not have a ‘permanent effect’ on the contract.
. But suppose the lockdown is extended for six more months: what then?
In those circumstances, it is possible that it is completely unfair to an employer to pay an unproductive employee for six months.
. What if there is a ‘Covid Clause’ in the employment contract?
Suppose that clause says that if the employee cannot work for more than two weeks, then the employment contract can be automatically terminated?
In those cases, it may be right to terminate the agreement – because both parties ‘foresaw’ this possibility. It binds the employee.
. Now, look at it from the side of the employer
It is a question of economic necessity. The employer runs a business; not a charity.
To pay his employees, an employer has, first, to make profits. From his earnings, he can pay his employees.
If the employer cannot generate any income, it would be totally unfair to expect him to pay an unproductive employee any wages.
The suggestion of the Minister for Human Resources that employers ‘must’ pay the salary of their employees is, for the moment, not entirely entirely wrong: see here. That statement is supported by at least one Commonwealth authority.5The Management, Krishnaveni Roadways, Madurai v. I.P. Punnaivanam & Another  II LLJ 137, at p.137, per Srinivasan J
The employment of an employee who has been – through no fault of his own – forced to stay at home is only ‘suspended’, not ‘terminated’.
His employment continues.
His contract of employment is neither ‘terminated nor ‘frustrated’.6 Ibid Krishnaveni Roadways, Madurai. That Indian case was cited by a Malaysian advocate, Mr. VK Raj, in the case of Telekom Malaysia Berhad v. Ramasamy A/L Periasamy, (In The Labour Court Of Kuala Lumpur) Case No: KBKL/1224/2002. Although the Malaysian employee lost the case at the Labour Court and did not pursue an appeal, the Indian High Court decision, in my view, is quite proper.
And so the employee has to be paid his wages – for the moment.
If the ‘lockdown’ persists for an extended period, the legal scenario may change.
. How long is the employer to carry the employee’s load?
If the employers across the country exercise their humanitarian sense of compassion, they could assist employees for a short while.
If the national emergency exceeds two weeks, then depending on which industry the employee is engaged in; and the financial position of the employer; different results will occur.
. How can the Government help?
Is it possible for the Government to say to the employers that if they continue to pay the salaries; then the employers can deduct for amounts paid to the employees from any tax that they have to bear at the end of the year?
Would it also be possible, as France has done, for certain sums of money is to be set aside by the Human Resources Ministry to assist the poor and the needy?
The other solution is of course for the employee to accept a lesser than regular salary from the employer.
Some would argue that this is not a good solution. It is not practical; it will not work.
. What about banks? And their loans?
Is it possible for the banks, as an act of compassion, like some European countries have done, to grant a ‘loan amnesty’? France, for example, has agreed to guarantee up to $335 billion of bank loans to companies in an effort to bolster its economy: (see here).
Could the banks postpone any repayments for the month of March?
Could they give a repayment amnesty?
And if they did that, could the Government give them some form of tax incentive? The UK Chancellor Rishi Sunak unveiled the UK’s plan to ‘expand Business Rates reliefs, a Coronavirus Business Interruption Loan Scheme to support up to a further £1 billion lending to SMEs, a £2.2 billion grant scheme for small businesses, and .. a deferral period on their tax liabilities.’ (See here).
Who will bear the interest for this period?
. Economic stimulus
Small to medium-sized enterprises (SMEs) are in the dumps.
There is a real cause for the Government to come up with some form of economic aid for them: so that they can manage.
. International Contracts and Force Majeure
It means, ‘a change or unavoidable accident’. It is also an event outside the control of the parties: e.g. riots, strikes, wars, a plague, hurricanes, floods, earthquakes, or volcanic eruptions. (Called casus fortuit in France, and casus fortuitus in Latin)
Force majeure clauses are common in international contracts.
It is a parallel concept to that of common law frustration. ‘Force majeure’ is a European doctrine.
Its principles and applications are almost similar to the common law principles of ‘frustration’.
. Consequences of a Force Majeure event
When a ‘force majeure event’ occurs, it excuses contracting parties from fulfilling their respective obligations.
The slight difference between frustration and force majeure is: while frustration completely releases the parties from their obligations, in force majeure, a party’s responsibilities is only suspended for the duration of the disaster. Certainly the covid-19 virus pandemic qualifies as a force majeure.
. The bar on force majeure is too high
International law places a ‘high bar’ on a defendant who wishes to plead force majeure.
The coronavirus has brought about international restrictions in the movement of men, machinery, ships and aircraft between nations – this has completely altered the contractual landscape.
The disaster is of such an international scale that one can safely say that the ‘high bar’ has been crossed.
. Need to prove three elements to succeed in a Force Majeure Defence
These are (1) externality; (2) unpredictability; (3) and irresistibility.
To prove ‘externality’, a defendant must show that he had nothing to do with the happening of the event (in common law ‘self-induced’ frustration is no frustration’).
‘Unpredictability’ is proven by showing that the defendant never foresaw the pandemic – and so could not have been prepared for it.
‘Irresistibility’ is demonstrated by proving that the consequences of the pandemic could not have been prevented.
Plagues, hurricanes, and earthquakes usually succeed under this ground.
. Some practical advice for International contracts
Most force majeure clauses are contract-specific. So, examine if your contract has a force majeure clause. Analyse how it has been worded.
See if a pandemic falls within its definition.
If the answer is Yes, then check what are the consequences you have agreed to e.g., the other side – or you – may be totally excused from performing the entire contract. Or the reprieve may only last the duration of the pandemic.
If you are in doubt, engage legal experts.
. The general effect of force majeure clauses
Generally, the law of force majeure excuses a party’s non-performance when an extraordinary event prevents it from fulfilling its contractual responsibilities.
Finally, communicate early, and effectively. Comply with any ‘notice clause’ in your contract: you may have to notify the other side of your inability to perform.
Do not wait until the last moment.
. What if your contract does not have a force majeure clause?
Then, you need to fall back on to the general law: if the contract is to be performed in a common law jurisdiction,8the Commonwealth you can invoke frustration.
If you conduct your business in Europe or other jurisdictions, look for force majeure-like defences.
. What about the economic impact on international contracts?
Many large companies are involved in international businesses with foreign companies and entities.
Going strictly by the law, it is not at all possible for local companies to ask for any kind of ‘commercial amnesty’ for their failed international obligations during the coronavirus phase: payments may have been missed, deliveries delayed, or ships may be stuck at ports, with shipowners or charterers ‘bleeding demurrage’ and forced to pay extra port or storage charges.
But it is entirely possible for the Malaysian Foreign Office to come to some understanding with foreign countries.
Both sides could relax their respective obligations.
Meanwhile, international banks could assist these businessmen with fresh funds, at a lower interest rate.
. Who will pay for the money Government hands out?
Any money that goes out of the Treasury has to come from somewhere. From where? You and me!
We cannot expect the Government to keep giving handouts and then howl when taxes are increased.
. Ask any economist:
It is really a bad idea to increase taxes for big businesses to reduce the national deficit.
The big businesses drive the economy.
To attract big businesses, we need to make it attractive, easy and provide a legally stable environment for them.
These are the investors who are willing to bring in capital to help our economy.
The Government needs to come out with a comprehensive plan by which it will not punish the big boys – this will energise the economy.
In litigation, parties have to file papers within the time prescribed by the Rules of Court.
After the office lockdown on March 18, practising lawyers could not file papers in court.
The court services are mostly suspended.
The Chief Justice should issue a Practice Direction granting litigants a ‘time amnesty’.
Time should ‘start to run’ only from April 01, 2020.
This would be a fair request.
Under the law of limitations, a party must sue in contract or in tort9a civil wrong, e.g. an accident claim within six years of the breach of his rights.
In such cases, the courts should be more amenable to extensions of time .
. A Special Panel of Arbitrators
Many commercial and employment cases will flow from the pandemic lockdown.
To prevent courts from being flooded with litigation, the government should set up Special Arbitration Panels for different kinds of disputes: e.g. employment, international trade, and local commercial disputes.
If implemented, this would reduce the burden on the courts.
[The author expresses his gratitude to Mr VK Raj, Ms. KN Geetha, Mr. JD Prabhkirat Singh, Mr. GS Saran, Miss KP Kasturi and Tina Syamsuriatina Ishak for their assistance.]