15 April, 2020
On 7 April 2020, the Singapore Parliament passed legislation providing temporary relief to certain businesses and individuals who are unable to fulfil their contractual obligations due to COVID-191. The COVID-19 (Temporary Measures) Act 2020 (the "Act") is the Singapore Government's most decisive action yet in its drive to combat the negative economic consequences of the COVID-19 pandemic; indeed, reflecting the urgency of the situation, the bill was introduced to parliament and passed on the same day.
In this briefing, we explore some key provisions of the Act, with particular reference to construction contracts and supply contracts for construction works, before discussing whether the Singapore Government's approach could be a model for other countries.
Key provisions
Moratorium on legal actions – Section 5
At the heart of the Act is Section 5, which imposes a temporary moratorium on legal actions relating to a party's inability to perform obligations under (among others) construction contracts and supply contracts for construction works,2 where such inability is to a material extent caused by COVID-19.
Specifically, this moratorium:
- suspends certain defined legal actions, including the commencement or continuation of an action in court or domestic arbitration, enforcement of any security over any immovable property or movable property used for a trade, business or profession, applications for winding up or bankruptcy, and enforcement of a court judgment, domestic arbitral award, or determination by an adjudicator under the Building and Construction Industry Security of Payment Act ("BCISPA");
- applies only to scheduled contracts entered into before 25 March 2020;
- applies to a "subject inability", being an inability to perform an obligation due for performance on or after 1 February 2020 where the inability is to a material extent caused by a COVID-19 event (as defined in the Act);
- applies only if the affected party has served a notification for relief to its counterparty, any guarantor or surety, or other persons as prescribed;
- is only temporary, remaining in place until the earliest of the expiry of the "prescribed period" (not yet published, but currently up to six months), the withdrawal by the affected party of its notification for relief, or the determination by an assessor that the case in question is not one to which section 5 applies; and
- does not affect a party's ability to pursue relief in relation to the subject inability pursuant to the Frustrated Contracts Act (Cap. 115) or a force majeure clause in the contract where applicable.
If a party served with a notification of relief disputes that the case in question is one to which the moratorium in section 5 applies, any party may apply for an assessor to determine the matter. Such assessors:
- will be appointed by the Minister for Law and come from sectors such as accountancy, law and industry with the intention that they serve a policy, rather than judicial, function; 3
- will render a final and binding determination as to whether section 5 applies, such determination not subject to appeal;
- may take into account the ability and financial capacity of the affected party to perform the relevant obligation and must seek to achieve an outcome that is just and equitable in the circumstances of the case;
- may, in cases where they find section 5 applies, make further determinations in order to achieve an outcome that is just and equitable including (without limitation) requiring a party to the contract to do anything or pay any sum of money to discharge any obligation under the contract.
Unlike most legal proceedings, parties may not be represented by advocates and solicitors in proceedings before an assessor (although may be supported by legal counsel in preparing for those proceedings) and each party must bear their own costs for the proceedings, regardless of the outcome.
Further relief for construction contracts and supply contracts – Section 6
In addition to the general moratorium in section 5 of the Act, further relief is available where a case mentioned in section 5 involves a construction contract or supply contract:
- parties are prohibited from calling on a performance bond in relation to the subject inability at any time earlier than seven days before the date of the performance bond's expiry (or the date of expiry following an extension under the Act);
- parties are entitled to make an application to the issuer of the performance bond to extend the term of the performance bond. Provided this application is served on the other party/parties to the contract at the same time, such term will automatically be extended to seven days after the end of the prescribed period (currently up to six months) or such other date as may be agreed between the parties and the issuer;
- for the purposes of calculating liquidated damages under the contract or other damages in respect of the subject inability, the period for which the subject inability subsists shall be disregarded in determining any delay in performance (provided the subject inability occurs on or after 1 February 2020 and before the expiry of the prescribed period); and
- the affected party is entitled to use the subject inability as a defence to a claim for breach of contract (again, where the subject inability occurs on or after 1 February 2020 and before the expiry of the prescribed period).
Each of these measures apply despite anything to the contrary in the contract or performance bond. The last two measures are particularly crucial, effectively suspending liability in respect of non-performance of construction and supply contracts rather than simply deferring a counterparty's ability to act on that non-performance (as is the case under section 5 for most of the other scheduled contracts).
Questions as to how the Act will operate in practice
As with any new legislation, particularly one as ambitious and unprecedented as this, there are bound to be questions about how the Act will operate in practice. These include:
1. Does the Act provide relief if it simply more difficult to perform because of a COVID-19 event?
The cornerstone of the Act is that a party must be "unable to perform" obligations in the relevant construction or supply contract. But does such inability mean legal or physical impossibility of performance? Or simply performance that is made more difficult by the relevant COVID-19 event?
Similar issues often arise in interpreting force majeure clauses. Clauses which refer to "prevention" of performance are usually interpreted as requiring legal or physical impossibility of performance, whereas clauses referring to performance being "hindered" are interpreted to mean performance that is more difficult, but not impossible.
On its plain language, "unable to perform" suggests impossibility. But is that consistent with the aims of the Act? Should "unable to perform" be clarified to mean material difficulty in rendering performance? While the assessors will undoubtedly assess each case on its merits (that being implicit in their obligation to reach a just and equitable outcome in the circumstances of the case), clarification on this issue may assist their task.
2. Will decisions of assessors be made publicly available and will they have any precedential value?
It is not clear on the face of the Act whether assessors' decisions will be made publicly available and if so, whether they will have any precedential value for future assessors' decisions.
For the benefit of certainty within the business and legal communities, particularly in respect of such a new and untested piece of legislation, there may be support for decisions of assessors to be made public, at least on a redacted basis. Given the necessarily fact-sensitive nature of the decisions, the just and equitable standard applied by assessors, and the need for expediency in reaching decisions, we would, however, caution against setting up any kind of system of precedent for assessors' decisions. Previous decisions should, at most, be persuasive only.
No doubt these, and other issues, will be clarified in the coming weeks and months as the Act enters into force and assessors start making decisions as to its application.
A model for other countries?
It is hard to overstate the novel and unprecedented nature of this legislation, particularly in the common law world.
We are, however, living in unprecedented times and bold, decisive action is clearly what is needed. The Singapore Government is to be commended for taking the lead in developing what hopefully will be an effective form of relief for struggling businesses in industries like the construction industry.
While there are clearly some uncertainties in how the Act is to apply in practice, the Act does at least set a starting framework that could be replicated elsewhere. We expect to see pressure from industry groups in other countries, particularly in the construction industry and other industries strongly impacted by the COVID-19 pandemic, to lobby governments to legislate for similar relief. Governments similarly will need to develop their own policy positions in response.
While a patchwork of legislation (and, in some jurisdictions, doctrines such as hardship and frustration) in different countries may well provide relief in the short term, support may also grow for measures of this type to be applied on a cross-border basis should the situation continue over a longer period. The COVID-19 pandemic is clearly not limited by borders and neither is commerce, and we may well see consideration of a cross-border response by way of international convention or the like.
For further information, please contact:
Rob Palmer, Partner, Ashurst
rob.palmer@ashurst.com
1. See here for an overview of the COVID-19 (Temporary Measures) Bill. The Covid-19 (Temporary Measures) Act 2020 can be accessed here.
2. Other scheduled contracts include performance bonds granted pursuant to a construction or supply contract, certain loan facility contracts secured against commercial or industrial immovable property or plant/machinery located in Singapore, certain hire-purchase agreements, event contracts, tourism-related contracts, and leases or licences of non-residential immovable property.
