15 April, 2020
The COVID-19 pandemic and associated public health measures imposed by government around the world has had unprecedented and unforeseeable impact, including supply chain disruptions and manpower shortages, undermining the ability of individuals and businesses to fulfil contractual obligations. Individuals or companies who are unable to meet their obligations, whether due to cash-flow difficulties, supply chain disruptions, reduced customers, cancellation of revenue generating activities due to safe distancing measures or other extenuating circumstances, may have to pay damages or forfeit deposits as a result of breach of contract, which may potentially lead to litigation or possible insolvency in more serious cases.
In light of the above, the Ministry of Law has on 1 April 2020 announced that it intends to introduce the COVID-19 (Temporary Measures) Bill (the "Bill") in Parliament next week, which seeks to offer temporary relief to businesses and individuals who are unable to fulfil their contractual obligations because of COVID-19.
The Bill aims to provide temporary and targeted protection for businesses and individuals who are unable to fulfil certain contractual obligations due to COVID-19 and seeks to provide temporary cash-flow relief for such businesses and individuals who may otherwise have to pay damages or risk having their deposits or assets forfeited.
Contracts covered under the Bill
The contracts that will be covered under the Bill include (i) leases or licences for non-residential immovable property; (ii) construction contract or supply contract; (iii) contracts for the provision of goods and services for events; (iv) certain contracts for goods or services for visitors to Singapore, domestic tourists or outbound tourists or promotion of tourism; and (v) certain loan facilities granted by a bank or a finance company to small medium enterprises with turnover of not more than S$100 million in the latest financial year. The press release does not provide details on the scope of the contracts, especially in relation to (iv) and (v), and we await further details on these once the text of the Bill is introduced and the Act is passed.
Legal Protections – Prohibited Proceedings
The Bill will prohibit a contracting party from taking the following legal actions against a non-performing party in the context of any non-performance of the contracts covered under the Bill: (i) commencement of court and insolvency proceedings; (ii) enforcement of security over immovable property as well as movable property that is used for the purposes of business or trade; (iii) call on a performance bond given pursuant to a construction contract; and (iv) termination of leases of non-residential premises. In addition, relief will also be given in respect of forfeiture of deposits for events and tourism-related events. If a person who booked a venue for an event which has to be postponed because of COVID-19 restrictions, the venue provider cannot forfeit the person's deposit unless the provider obtains a determination from an assessor that it would be just and equitable to forfeit the whole deposit or a part of it, for example in situations where the person cancels the booking entirely. In the case of construction and supply contracts, a contractor will be relieved from liability for non-performance if this was materially caused by COVID-19. However, questions remain as to what happens if the reason of the non-performance of the contracts is not due to COVID-19. For instance, where a retail outlet is unable to fulfil its rent payment obligations during this period, it remains unclear as to whether landlords are automatically restrained from enforcing legal actions as a matter of course, or whether it must be shown that the failure to pay rent is due to COVID-19, such as due to drastically lower footfall as a result of the safe distancing measures imposed. There is also currently uncertainty as to the implications on legal actions that have already been taken prior to the Act being passed.
It is also unclear at this stage whether the measures under the Bill will affect contracts with arbitration clauses and/or dispute resolution clauses which provide for a non-Singapore court to determine disputes between the parties. Even if the Bill does not expressly cover such dispute resolution clause, there is a substantial question as to whether any foreign court judgment or arbitral award will be refused recognition and enforcement in Singapore on the basis that it would violate the public policy of Singapore.
Assessors as Safeguards
As a safeguard against unfair outcomes, assessors will be appointed by the Ministry of Law to resolve disputes arising from the application of the Act. The assessors will decide if the inability to perform contractual obligations was due to COVID-19 and will have the power to grant relief that is just and equitable in the circumstances. This process is intended to be affordable, fast and simple and parties will not be allowed to be represented by lawyers. No cost orders will be made and assessors' decisions will be final and not appealable. Details of the application process will be released at a later date. No further details on the identities and selection process of the assessors or details of their remuneration were included in the press release, although reference has been made for assessors to be professionals, such as an accountant or a lawyer. There may also be potential conflicts of interest between the assessors and a party and these would have to be resolved, presumably prior to an assessor being assigned to an application. We look forward to receiving more clarity on these issues in the coming days.
Increase in Monetary Limits for Insolvency and Relief for Directors
The Bill also seeks to increase the monetary thresholds and time limits for bankruptcy and insolvency. For individuals, the monetary threshold for bankruptcy will be increased from S$15,000 to S$60,000 and for companies and partnerships, the monetary threshold for insolvency will be increased from S$10,000 to S$100,000. Directors will also be temporarily relieved from their obligations to prevent their companies trading while insolvent if the debts are incurred in the company's ordinary course of business, although they will remain criminally liable if the debts are incurred fraudulently.
The proposed measures will apply retroactively to cover relevant contractual obligations that are to be performed on or after 1 February 2020 (being the approximate date when the impact of COVID-19 started to be significantly felt in Singapore's economy), for contracts that were entered into or renewed before 25 March 2020 and will be in place for an initial period of six months from the commencement of the Act and may be extended for up to a year from the commencement of the Act. It must be highlighted that the Bill is not intended to absolve parties from their contractual obligations, but to suspend such obligations for such stipulated period of time.
The press release by the Ministry of Law is accessible here. As the information in this article relates to a proposed Bill that has not been passed into legislation, we encourage parties to review the language of the Bill when it is introduced into Parliament on or around 6 April 2020. Arising from the urgency of the situation the Bill is intended to address, all three readings of the Bill are intended to be taken in one Parliament sitting, and we expect the Act to come into effect soon thereafter.
For further information, please contact:
Marcus Chow, Partner, Bird & Bird
marcus.chow@twobirds.com
