First published on 7 April 2020.
The unforeseeable COVID-19 outbreak and its associated responses by governments worldwide has had an unprecedented economic impact, especially for businesses who are unable to meet their contractual obligations because of COVID-19.
Singapore’s Ministry of Law therefore recently announced on 1 April 2020 that it intends to introduce a Bill in Parliament this week to offer temporary relief and protection for individuals and businesses who have been affected by COVID-19. This is known as the “COVID-19 (Temporary Measures) Bill”, or “COVID-19 Bill” for short.
In this article, we will first briefly discuss the concepts of legal frustration and contractual force majeure under Singapore law. We will then introduce in detail the key relief measures that the new COVID-19 Bill provides and how they affect other business rights under Singapore law.
Doctrine of Frustration
A contract is considered frustrated when not within both parties’ control, an event happens (such as COVID/government lockdown) which causes either or both parties’ obligations to be physically or legally prevented. This is known as frustration. If a contract is frustrated, the parties will be discharged from further contractual obligations from the date of frustration.
If an event only makes obligations more onerous, this does not equal frustration. Thus, if the COVID-19 or its associated government measures (e.g. travel restrictions) only makes contractual obligations more difficult or more expensive to perform, but not impossible to perform, then it is likely that such an intervening event will not meet the high threshold required under Singapore law to frustrate a contract.
Force Majeure Clause
Some contracts may contain a force majeure clause. This is a party-led device to better plan for what amounts to a ‘frustrating’ event, and to plan the consequences arising from the event: for example, to suspend or discharge the contractual obligations of one or more parties to a contract (including extension of time).
Unlike frustration, a force majeure clause derives its legal force solely from the mutual intention of the contracting parties, and the relief it provides is available regardless of whether frustration would have applied.
The ambit and effect of every force majeure clause differs from case to case, and must be determined by construing the words used within the clause, as well as by looking at the contract as a whole. Thus, whether COVID-19 would be covered by the force majeure clause would highly depend on how the force majeure clause has been worded.
The effect of the new COVID-19 Bill
On top of the doctrines of frustration and force majeure, Singapore’s new COVID-19 Bill, when passed, will also further suspend/affect parties’ rights to a great extent, as explained below.
What types of contracts are covered under the Bill?
The Bill covers the following types of contracts:
– Secured loans to enterprises with less than SGD100 million turnover in the latest financial year;
– Hire purchase contracts for business purposes;
– Contracts for events;
– Tourism-related contracts;
– Construction or supply contracts; and
– Leases / Licences for non-residential, immovable property.
Is there a cut-off period for contracts which are covered in the Bill?
The Bill applies to all aforesaid contractual obligations in existing contracts to be performed on or after 1 February 2020 (“Act Start Date”).
Contracts entered into or renewed on or after 25 March 2020 are not covered, presumably because people contracting in such period should take into account the COVID-19 pandemic.
How long will the protections under the Bill last?
(Summary: Expected to be 6 months from commencement date)
Once the Bill is passed in Parliament, which is likely to be today or within this week, it becomes an Act of Parliament (the “Act”) and comes into force once gazetted. The Act is expected to offer temporary relief from contractual obligations for 6 months from the commencement date of the Act, and can be extended by the Minister for Law for up to 1 year (the “Act End Date”). The Minister can also shorten the period if desired.
The commencement date of the Act will be announced only after the Bill is passed and gazetted.
What kind of temporary relief is provided for in such contracts?
(Summary: If affected party serves notice, relief from performance/termination/enforcement and suit during relevant period. Obligations remain outstanding but interest does not accrue during relevant period. Obligations become fulfillable at end of relevant period.)
Procedure: If a party is unable to perform an obligation in a contract because of COVID-19, the affected party may first serve a Notification for Relief on the other relevant parties to the contract.
Effect/Relief: Once the Notification for Relief is deemed served, the affected party seeking relief, the guarantor or surety (if any), is temporarily protected from the following actions that could otherwise be taken by the other party:
– Termination of contract due to the affected party’s inability to pay rent or other monies;
– Starting or continuing any court or arbitration action, including but not limited to:
o civil suits;
o bankruptcy;
o winding up;
o judicial management;
o scheme of arrangements;
o the appointment of a receiver or manager;
o levying of execution, distress or other legal process against any property, except with leave of court; or
o repossession of goods;
– Enforcement of security over immovable property;
– Enforcement of security over movable property used for trade, business or profession purposes;
– Exercise of right of re-entry or forfeiture; or
– Enforcement of court judgments, domestic arbitral awards or adjudication awards.
It becomes a criminal offence for the other party to take any of the above actions without reasonable excuse during the relief period. The punishment for such an offence is a maximum fine of $1,000. In addition, such proceedings will be dismissed, voided or invalid, as the case may be.
However, the Bill does not prejudice the ability to take any other action which would contravene the above, such as an action pursuant to the Frustrated Contracts Act (Cap. 115) or a force majeure clause in the contract.
Additional relief given for construction/supply contracts
(Summary: no call on performance bonds, extension of performance bonds to end of relevant period, liquidated damages cannot cover relevant period and new COVID-19 defence)
On top of the above, in the case of construction or supply contracts:
– A call on a performance bond or equivalent cannot be made unless there is 7 days or less before the date of the expiry of the bond (or the equivalent). Plus, the date of expiry can be extended to either (a) a date that is 7 days after the End Date, or (b) an agreed date among all parties to the contract and the issuer, subject to the fulfilment of specific conditions in the Bill by the affected party.
– It is a criminal offence to make an earlier call for a performance bond (or the equivalent) in breach of the moratorium, punishable with a maximum fine of $1,000. In addition, the purported call on the bond (or its equivalent) in breach of this moratorium will be void.
– In computing liquidated or other damages, any damages between the Act Start Date and Act End Date which are materially caused by COVID-19, or by any of the Singapore government’s rules, orders or directions in connection with COVID-19, must be disregarded from the computation, i.e. such damages are not claimable.
– The Bill also introduces an additional new legal defence for a breaching party. If the breaching party’s inability to perform its obligations is ruled to be materially caused by COVID-19 or by any rules, orders or directions in connection with COVID-19, this would be a valid defence to a claim for a breach of contract. This defence only applies to contractual obligations occurring between the Act Start Date and Act End Date.
Additional relief given for event contracts and tourism-related contracts
(Summary: No forfeiture of deposit, new Covid-19 defence)
– After being served with a Notification for Relief, the other party is not allowed to forfeit any part of a deposit placed unless the Notification for Relief is withdrawn, or an assessor determines that the forfeiture is just and reasonable. It is a criminal offence to forfeit any part of the deposit in breach of the above requirements, which is punishable with a maximum fine of $1,000. In addition, the purported forfeiture of the deposit will be void.
– The Bill also introduces an additional legal defence for the affected party if it faces a claim for payment of a cancellation fee. If the breaching party’s inability to perform its obligations is ruled to be materially caused by COVID-19 or by any rules, orders or directions in connection with COVID-19, this would be a valid defence to a claim for a cancellation fee. This defence only applies to contractual obligations occurring between the Act Start Date and Act End Date.
Procedure for seeking relief under the Act
The affected party must, within the specified period (to be elaborated in future regulations), either (i) serve a Notification for Relief on the relevant parties or (ii) apply, in the specified manner accompanied by the prescribed fee, to the Registrar of assessors and serve a copy of the Notification on the relevant parties.
If an application is made to the Registrar, an appointed assessor will determine whether the case is one to which the Bill applies.
The assessor’s determination is binding on all the parties to the application and there is no appeal from an assessor’s determination.
Are there any other temporary relief for those in financial distress?
(Summary: Extensively increased thresholds for bankruptcy and insolvency both as to amount and time period to match expected relevant period of statutory protection)
The Bill introduces temporary amendments to bankruptcy and insolvency laws. The key amendments are set out below:
Individuals / Bankruptcy
– A bankruptcy application on the basis of a Statutory Demand (“SD”) can now only be made against an individual if his debt exceeds $60,000 instead of $15,000.
– An individual who is served with a SD now has 6 months to comply or to set it aside instead of the original 21 days. Similarly, a creditor can only commence bankruptcy proceedings against him after the expiry of 6 months from the date of the SD.
– It is currently an offence for a bankrupt to incur any debt if he has no reasonable expectation of being able to repay it, and if the debt occurs within 12 months before the date of the bankruptcy application. However, the Bill provides a new defence to such an offence, so long as:
o the debt is incurred in the ordinary course of the bankrupt’s trade or business;
o the debt is incurred during the during the prescribed period; and
o the debt was incurred before the application for voluntary arrangement or bankruptcy.
Companies / Limited liability partnerships (“LLP”) / Business trusts
– A winding up application on the basis of a SD can now only be made against a company/ LLP if its debt exceeds $100,000 instead of $10,000.
– A company / LLP which is served with a SD now has 6 months to comply instead of the original 21 days. Similarly, a creditor can only commence winding up proceedings against it after the expiry of 6 months from the date of the SD.
– It is currently a criminal offence for an officer of a company/ LLP to knowingly contract a debt without expectation of the entity being able to repay it. This is known as ‘wrongful trading’. The Bill now provides a new defence to such an offence, so long as:
o the debt is incurred in the ordinary course of the entity’s / partnership’s trade or business;
o the debt is incurred during the prescribed period; and
o the debt was incurred before the appointment of a judicial manager or liquidator of the entity / partnership.
– Likewise, the above defence extends to wrongful trading which would otherwise have been committed by officers of the trustee-manager of a registered business trust.
Have the temporary reliefs in the Bill already taken effect?
No, this is only a draft piece of legislation released by the Ministry of Law last week, expected to be passed in Parliament this week. Our views herein are based on the draft COVID-19 Bill to date, to provide you with a better understanding of the Bill, and what its implications are if the Bill is passed in Parliament as is. Our views may be adjusted if the final wordings in the Bill change.
Disclaimer
The information in this article is correct as of the date of this article. The article does not constitute legal advice in any way. If you require advice in relation to the contents of this article, please approach us for further assistance.
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Authors: Lim Ming Yi, Yeo Shan Hui, Jaryl Lim, Gabriel Kwek.