OPINION

Issue

1. SME Bank wishes to ascertain whether, with the current epidemic of coronavirus affecting not only the
nation but has gripped the world at large, the Bank has the right to cancel, suspend, withhold or to the
extreme end, cancel and terminate the financing facility granted by SME Bank to the Customer.

2. The gravity of the epidemic has compelled the Government of Malaysia to issue the Movement Control
Order (Order) which is effective from 18 March 2020 to 31 March 2020 (which may or may not be
extended).

3. The Order has caused a circumstance which is beyond the control of the Bank and the Customer of which
arguably gives rise to an event of force majeure. Such an event will, in the ordinary course enables a party
required to perform an obligation to suspend its performance until such time that the event of force
majeure is removed, lifted or ceased to exist.

Bank’s legal position

4. The Bank may approach the above issue via the following options:

Discharge by Frustration

5. Discharge of contract by Frustration under Section 57(2) of Contracts Act 1950

 Refer to a situation where there exists a change in circumstances after the contract was made
which is not the fault of either party that renders the contract either impossible to perform or
deprives the contract.

 In such case, the effect of the contract is void ab initio.

 In relation to the current situation, we are of the view that generally, it has yet to reach the stage
where it is impossible for both Bank and the Customer to perform the contract. Parties may have
the option to suspend or delay the performance of the contract to a later stage; as of now.

Material Adverse Change clauses

6. In summary, the Material Adverse Change (MAC) clauses as appeared in SME Bank’s standard agreement
encompasses the various scenarios such as any litigation (initiated or threatened) changed in the
Customer’s condition (financial or otherwise) or occurrence of extraordinary circumstances which would
prejudice or affect the Customer’s ability to perform its obligations under the financing facility.

7. MAC clauses provide the Bank with the option to suspend, withhold or terminate the financing facility.

8. However, the enforceability and the effectiveness of MAC clauses will depend on the facts of the
particular case and also the scope of the clause. If the MAC clauses are invoked without proper
justification, the Bank will be in breach of contract and its reputation may also be affected. GL is of the
view that the MAC clauses may not be the best option for the Bank to invoke, especially when the
Customer is not at fault or instigate the breach in the financing facility.

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Force Majeure Clause

9. The standard force majeure clause in SME Bank’s financing facility (clause 16.27 of the facility agreement)
DOES NOT stipulate the words “epidemic”, “outbreak of diseases” or “Act of God” but instead uses the
term “change in the national or international money, financial, economic conditions …… has occurred any
form of any interruption…. that materially affects ……the obligation of the Bank under the financing
facility”.

GL is of the view that the Bank may invoke the above clause to trigger the current force majeure event.
The Court however in considering whether the contracting parties can invoke the force majeure clause
will look into the following considerations:

i. Foreseeability of the event – events which could have been reasonably provided against,
avoided or overcome will be excluded. GL is of the view that this element can be fulfilled as the
scale of this epidemic is unprecedented.

ii. Causal Link and Impact – The event must have prevented or hindered parties from performing
the contract. GL is of the view that this will be an arguable point. The Bank may argue that
disbursement cannot be made since the procedural requirements to safeguard the interest of
the Bank cannot be fulfilled.

iii. Mitigation – Defaulting parties are under a duty to show that reasonable steps are taken to
prevent or mitigate the effects of the coronavirus pandemic. SME Bank must show that these
steps are taken.

iv. Notice Requirement – Parties seeking for relief under force majeure must comply with the
prescribed notice requirement/process under the contract. Failure to do so may render the
affected party not being able to rely to the provision. SME Bank must comply with this
requirement and ensure evidence of these notices are kept properly.

v. Consequences – Consequence in relying to force majeure provision is normally provided under

the contract. This requirement is provided under SME Bank’s standard template financing
documents.

Conclusion

10. In conclusion, GL is of the view that the most prudent option for the Bank to exercise is the Force Majeure
clause and abide by all the procedures laid down in the financing facility to invoke this clause which can be
summarized as follows:

a) Bank and customer to enter into discussion for a mutually acceptable solution within 30 days from the
issuance of written notice by the Bank. Pending such solution, no utilization of financing facility may be
made or allowed.

b) If by end of 30 days, no mutual solution has been agreed upon, the Bank shall have the right to terminate
the Facility (immediately or at any time) by 14 days written notice. In such case, the whole of
indebtedness by the Customer shall become immediately due and payable.

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